(snip)"Earlier generations bought houses knowing they had no choice but to keep paying at the same rate for three decades. Their reward: the ability to sleep well, knowing their payments wouldn't abruptly adjust upward.
As interest rates rose in the early 1980s, many borrowers couldn't afford these traditional loans. Lenders responded with adjustable mortgages that offered lower introductory rates.
A few years ago, as home prices began escalating sharply, lenders pushed loans that let the homeowner pay only the interest for an initial period.
When even that was too onerous for some borrowers, they offered loans such as Hertzberg's, often called "pay option" loans.
One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.
A second possibility is to pay $2,279, which would cover only the interest.
But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.
Essentially, option loans are bets that good things will happen. Maybe the mortgage holder will get a big raise, or sell a script to Hollywood, or inherit a chunk of change. When the borrower has to start paying off the loan in earnest in five years, the plan is that he or she will somehow be able to handle it.
At a minimum, the borrower is betting the housing market will be better in a few years than it is today. If the house goes up in value, it will be possible to refinance and the day of reckoning can be put off once again.
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.
Last year, 1 in 5 loan applicants got one.
In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total."
(snip)""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."
Lenders say these new loans are all about payment choice, but Hertzberg is far from the only borrower who invariably chooses the smallest payment option. Washington Mutual Inc., which has one of the nation's largest portfolios of pay option loans, said 47% of its borrowers in this category last December took the minimum option.
Few people intend to become deeper in debt every month. Hertzberg certainly didn't.
"I assumed my future and my retirement would be taken care of by the company I worked for," he said. "I trusted corporate America."
He used to make a six-figure income selling vacation packages to corporations that would use them as customer incentives and employee bonuses. After the 9/11 terrorist attacks, the business soured.
His current sources of income include selling comic books on EBay and freelance photos to golf and travel publications. "Once you're over 55, what employer wants to hire you?" he asked. "I'm a dinosaur."
Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.
But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Calabasas-based Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115% of its original size he'll run out of credit with the company.
That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150%, to $2,848 a month.
"If I could afford that," he said, "I wouldn't have needed this loan in the first place."(snip)
"The bears' speculation: A rapid increase in foreclosures will flood the market with cheap homes, putting all of real estate into a tailspin. That would push up unemployment among builders, lenders, home improvement warehouses and furniture stores. That, in turn, would stall the economy, which is already slowing.
Although Hertzberg has lost his complacency, he hasn't been compelled to act.
He estimates it would cost about $22,000 to fix up his house for sale, and he'd have to upend his life. The sales agent would take another chunk of money, and he'd have to undercut the crowded market to secure a buyer. Texas and Panama, two places he has thought about moving, aren't so appealing that he wants to be broke there.
When the year-over-year appreciation numbers in Corona start heading down, he says, he'll do something.
If Hertzberg is living on borrowed time, there's small comfort in the home finance industry's endless inventiveness. It's certainly trying to tempt him. Several times a week, he gets a refinancing offer in the mail.
The latest one suggested a certain unfamiliarity with basic English, proclaiming, "Economic forecast suggests you Interest Rate will increase 1.00% every six months." But its central message was clear: "We can solve your problem in 15 minutes over the phone."
Hertzberg always looks at these fliers, hopeful in spite of himself. "I'm waiting for a 100-year loan," he said. "My heirs can worry about paying it off."(snip)



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