Wednesday, May 03, 2006

More Than Heartburn: "Tricky" Home Loan Torpedoes the "Happy Life"

CBS 13 looks at a local family that gambled on a negative amortization loan and lost.

Leslie and Rob McDonald have the family sanctuary they've always wanted in their Modesto home. But this happy life now goes on under a shadow. "I didn't understand what we were signing. A lot of embarrassment, a lot of stress. My husband, well he's actually begun having heart problems now, because of it," says Leslie McDonald.

It is a tricky kind of home loan called a negative amortization mortgage. It's a kind of adjustable rate loan that allows you to keep your interest only payment the same for a guaranteed period as interest rates rise. But in the end the small payments don't cover the rising cost, and the difference is added to your mortgage balance, pushing you further in debt. "We're losing about a thousand dollars a month in equity in our home," says McDonald.

The McDonalds are not only stressed, they're angry, because they trusted a family friend who sold them the mortgage. "I think that there should have been a lot more explanation, because had we known this, we would never have signed this," says McDonald.

Sacramento mortgage broker Allen Hughes did not handle the McDonald's mortgage, but he says he's seeing lots of people in the same situation. He says the way these smaller payment loans are marketed can be misleading.

"The lender's selling that as some sort of protection against a payment increase, but conversely, what happens is the principal increases more radically than it would otherwise," says Hughes.

Hughes says the market has changed a lot in the past year, and interest rates are now more likely to go up than down, which makes a negative amortization loan, or any adjustable mortgage a bigger gamble. "My recommendation is that people get into some sort of fixed rate product, as soon as possible," says Hughes.


fishtaco said...

Unfortunately this is a perfect example of the "froth" in the market that Greenspan was refering to. Before this bubble has completely deflated there will be countless examples of this type of thing.

Anonymous said...

What a bunch of crooks! All they want is commissions on new loans. Oh but I forgot, you can always refinance. They were pumping all these shotty loans an now telling you to go fixed. There are a lot of sheisters in that business.

tom stone said...

even when people want a fixed loan,they can have a couple of problems 1) if they barely qualified for a 5.25% ARM,the do not qualify for a 6.53% fixed 30 year loan.2)ooops! home values have that 2% downpayment (and a good deal more in elk grove,lincoln,etc.) went away...and you now need more than a 100% cash out a falling market...i'm a loan broker,and i still have people i know who can go to a fixed loan but refuse to,even though they will not be able to make their payments if their ARM hits 71/2%...let alone the lifetime cap of 10%....lifetime caps at world went up 20 to 40% this year,and their loans turn over in 7 years...80% turn over in 5 years.

peterbob said...

"We're losing about a thousand dollars a month in equity in our home,"

Sorry, no sympathy. Their neighbors were probably gaining a thousdand dollars a month for a few years.

Some win, some lose.

Happy Renter said...

From Ben's blog

Sacramento was mentioned a few times.

Happy Renter said...

John Lockwood has an update on his Sacramento Real estate blog.

Prices are down YOY!
Last months gains are wiped out!

Spring hasn't panned out.