Thursday, September 15, 2005

ARM and LEG Loans

Cybele Weisser of MONEY Magazine wonders if this is how the housing bubble ends:
NEW YORK (MONEY Magazine) - Feeling nervous about real estate prices? Who can blame you? Even if you haven't bought or sold lately, the constant debate over whether or not there's a housing bubble is probably making you uneasy.

These prices are crazy, you think as you scan the local real estate listings. How can anyone afford to buy a house in this market?

That's a question a lot of home buyers are asking themselves these days, and a growing number are coming up with the same answer: Skip the 30-year fixed-rate mortgage and grab a riskier loan with a lower initial payment.

Interest-only, option-payment, 40-year fixed, piggy-back loan, low-doc loan: These weird mortgages come in an assortment of names and flavors, but they all have the same goal -- to help you afford an expensive home. How? More often than not by letting you put off paying down your mortgage.

A few years ago, so-called "nontraditional" mortgages were a mere sliver of the market (less than 3 percent by some estimates); a July survey by the mortgages Federal Reserve found that they now account for more than a quarter of new business at a third of the nation's largest home lenders.

That swift rise has industry observers worried.

"We're very concerned with how safe these products are," says Stu Feldstein, president of financial research firm SMR Research. "There's an awful lot of risk out there."

But who's at risk? Almost everyone. If you're a buyer, the risk is that you'll find yourself with a loan you won't be able to afford in a few years. But even if you're among the 75 percent of borrowers with a stodgy fixed-rate loan or the lucky 35 percent of homeowners with no mortgage at all, this loan lunacy could pose a danger to your home's value.

That's because experts fear that the rash of nontraditional loans has been driving up prices in many markets -- and could intensify the decline if prices soften.

"I think the creative mortgage structures have been the last puff on the real estate balloon," says Nick Buss, vice president of market research at PNC Finance. "Consumers were already stretched, and these products have stretched them just a little bit further."
Read the remainder of the story at this link.

— The Boy in the Big Housing Bubble