Saturday, September 29, 2007

You Don't Have a Right to a Mortgage

Thousands brace for mortgage rate jump - The Boston Globe Of course it's the Boston Globe. First they lament the high number of foreclosures - you know from all those people who signed up for loans that they could not afford. Then they lament the lack of loans.
"This is an unprecedented wave of resets," said Wellesley College economics professor Karl Case. "It’s going to lead to a credit crunch for people who will find it hard to find loans," he said, "and people are getting hurt badly when their houses are taken away from them."
Those people were hurt badly when the real estate profession (sic) decided to sell them homes that they could not afford.

This whole credit situation was caused by people not knowing what they could afford. But how do people decide that? They meet with a realtor. Look at and fall in love with a home. Probably the first time they see anything like the "true cost" is when they sit down to sign the mortgage documents and are shown the truth-in-lending statement (or whatever it is called) which is always explained away. And the sad state of education in this country means that people don't even know how to calculate - or look up - what their payment would be under certain loans.

Figuring out what you can afford is not difficult. Having the self-discipline to avoid buying the largest house the banks will right a loan for seems to be non-existent.
A large number of adjustable mortgages are subprime loans; in 2005, one in four people who purchased a home in Massachusetts used a subprime, adjustable mortgage. A typical subprime mortgage in 2005 had an initial rate of about 6 percent, which would reset this year to 9 percent, boosting monthly payments by 30 percent to 40 percent, depending on the size of the mortgage.
Why is anyone surprised at this? Certainly no one who has one of these loans should be surprised.

And 40% is on the low side, since a large number of sub-prime loans included negative amortization in the early "discount" years. They reference one person whose payment jumped from 2000 to 5000 bucks. A bit more than 40%.

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