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LA Times: A Loan That’ll Get Ugly Fast
By Molly's Brother | December 12, 2006
I rarely blog about real estate issues, but I read a fascinating article in today’s Los Angeles Times by David Streitfeld. I read “A Loan That’ll Get Ugly Fast” this morning and my heart is still in my stomach for this guy.
Will Hertzberg is profiled in the article. He’s a homeowner with a mortgage that lets him choose how much he pays each month. These pay option loans allows him to choose one of three payment choices each month:
- Option #1–Payment covers the principal and interest (traditional).
- Option #2–Payment covers the interest.
- Option #3–Payment is about 44% of Option #1, with the promise to cover the shortfall later.
By the time I read this, my heart already had that sinking feeling. After reading this part of the article, my heart sunk.
Here’s something else that struck me from the article. I’m astounded by the following fact:
- In California, in 2003 only 8 out of every 1000 people got a pay option loan
- In 2005, 1 out of every 5 people got one.
- In the first eight months of 2006, the number has risen to 1 out of 3.
I am floored by this. But it makes since if you take into consideration how we as Americans–or at least many of us–approach big-ticket purchases. We’re not concerned with the final amount. We’re only concerned with a low monthly payment.
From the article:
“Homeownership has become like auto leasing, where the price of the car doesn’t matter,” said Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. “All that matters is the size of your monthly payment.”
Honestly, a fascinating article. Well-written and worth the read. If you’re interested in reading the full article, I’ve posted the link below.
A Loan That’ll Get Ugly Fast by David Streitfeld, Los Angeles Times 12/11/2006
Topics: Lessons Learned |
December 12th, 2006 at 9:04 pm
I don’t quite understand the rate of the left over money that he’s not paying with the third option. If that interest rate is like 5% or something, perhaps it’s not the worst deal in the world as other investments can return 10%. If he were to set that money aside and do invest it smartly (and within reason), he could actually make his money work better for him than buying equity in his house. Yes it would be very rare, but depending on the exact it’s certainly possible.
December 13th, 2006 at 8:02 am
I think the larger problem here is that he doesn’t really have any financial flexibility to set money aside and invest it smartly. Perhaps years ago, before he refinanced and blew $190,000 he could have made his money work for him. Now, I think he’s in a house that he can’t afford and tied into a loan that gets worse every single day.