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Thread: further proof many Americans are financially irresponsible ...

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    Default further proof many Americans are financially irresponsible ...

    (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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    Default Re: further proof many Americans are financially irresponsible ...

    On the flip side...people are going into buying mortgages blind and uneducated. We use these ARMS all the time...and we never have this problem. We never will...we do the research and go from there. Part of the problem is that people are trying to buy homes that are too far out of their budget. Buy a home you can easily afford...and then flip it in two years (to avoid taxes) and move up. Keep doing this until you get into the house you want. People look at a small, cookie cutter house and cringe. But, WTF? We started with a Condo. Start small and work up...ease yourself into the bills of homeownership. People these days are building the biggest/best houses they can't afford and then cry because they cannot afford it.

    *sigh*

    Its a no win situation, sometimes. Living in a culture that puts value on what you finance and not on what you own creates people who over-extend themselves to keep up.

    Sad. Very sad. All I can say is that if people fully researched their mortgage options ahead of time...they would avoid this. You never, ever take these legal documents based upon what someone "says" they say.

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    Default Re: further proof many Americans are financially irresponsible ...

    It is just going to get worse.

    Listen to his call a customer had with Verizon regarding his bill. It is hilarious.

    Basically, what happens is that Verizon charged the guy $.002/kb but he was quoted (and this was noted in his account) to be only charged .002 cents/kb. The customer service rep, the manager, and the floor manager all believed that $.002 = .002 cents.

    Enjoy (its only 45 mins long but real good)

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    Featured Member Vamp's Avatar
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    Default Re: further proof many Americans are financially irresponsible ...

    There is so much predatory lending going on it boggles the mind. People dont educate themselves and many lenders use this to their advantage. Everything from mortgages, credit cards, and loans have so many fees and penalities in addition to the loan with terms that even a lawyer has a hard time understanding.

    Any of the largest three bank's profits for one quarter this year would make Exxon jealous.

    Yet people continue to play the game. Even people that usually pay off their bill every month are getting caught up in it. Money is getting tighter so they carry a balence. When they call to get a fee waived it's not so easy anymore. If they are one day late the Apr is increased to 30%. With their home equity maxed, their other cards maxed, even though they have a good credit score no other card company will touch them, and so they are stuck with the interest rate. Sound crazy? I see it every day.

    I hope it isnt so but I agree with the bear's view of things.

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    Default Re: further proof many Americans are financially irresponsible ...

    No real proof needed. But I agree, predatory lending is now the rage. Sub prime loans are now 40% of all loans. The changes in bankruptcy laws allow lenders to prey with little downside risk.

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    Default Re: further proof many Americans are financially irresponsible ...

    I read the article and it doesn't seem that this guy was uneducated or living beyond his means. It seemed it was either take a loan like this or not buy anything. His loan was $320,000, which doesn't buy much in CA.

    True, it does sound like a little wishful thinking (property values going up, his pension paying off or windfall of some sort.) But it also sounds like he didn't really have much choice, besides renting (not exactly a bargain either) or moving out of California.

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    Default Re: further proof many Americans are financially irresponsible ...

    But it also sounds like he didn't really have much choice, besides renting (not exactly a bargain either) or moving out of California.
    And herein lies the root of the 'irresponsibility' IMHO. From the link, Mr. Herzberg formerly held a very good paying job with a corporate travel agency which went belly-up after 9/11. Then, like countless other workers who have been downsized, outsourced, left unemployed by a company moving offshore, or left unemployed by a company that went bankrupt altogether, Mr. Herzberg was unable to obtain a 'replacement job' that paid anywhere near the same rate that his old job did. Nothing unusual here.

    However, rather than facing up to the fact that his income level will never again be what it used to be, and changing his lifestyle accordingly, Mr. Herzberg resorted to the tactic of substituting credit to offset reduced income in an attempt to keep spending the same total amount of money in order to hang onto a lifestyle that he could no longer afford. First he maxxed out his credit cards. Then he re-fi'd $190,000 in equity out of his tract home. Now he's going further in debt to his mortgage company with every passing month, and has received notice from that mortgage company that very soon his credit will be 'cut off' such that he'll finally be forced to start making 'realistic' mortgage payments which Mr. Herzberg has no way to afford making.

    When that finally happens, Mr. Herzberg will finally be forced to give up the fictional lifestyle he has been attempting to maintain for the past 5 years. This is likely to leave Mr. Herzberg with 'nothing' ... and is also likely to leave Mr. Herzberg's creditors with much less than Mr. Herzberg actually owes them - something that all other customers of those creditors will ultimately wind up having to pay for.

    The real question here is just how many former union auto employees, former IT professionals, former real estate agents, former ______s, are in exactly the same situation as Mr. Herzberg ? As the story reports, last year one in every five mortgage applicants took out a pay-option loan like Mr. Herzberg's, and 47% of those mortgage borrowers are making negative amortization minimum payments.

    As to 'moving out of California' (or Michigan for auto workers, or any other high cost of living state for that matter), there ARE places within those states where Mr. Herzberg could have afforded a smaller home with a smaller mortgage payment which would have been sustainable given his 'new' income level. However, those places probably would have involved a dominant language other than English and a high crime rate !

    Ultimately Mr. Herzberg is probably going to wind up in such a place anyhow, but renting instead of owning !!! However, as your comment touches on, and Mr. Herzberg's actions clearly indicate, its as if there exists some 'entitlement' right that once someone has been able to finance the purchase of a house in a certain 'nice' area that they are 'entitled' to keep living in that house in that 'nice' area for the rest of their lives as if mortgage payments, property taxes, and relative costs of living didn't exist. I'll grant you that, under the 'homestead' protections of earlier bankruptcy laws, this was often the case - but it isn't the case any longer.

    Either that or Mr. Herzberg will have to face up to the differences in costs of living between his 'home' state of CA and much lower cost states like Texas (which he mentioned). Had Mr. Herzberg faced his 'new' financial reality five years ago, he could have bought and paid for a decent home in Texas - and could have avoided monthly mortgage payments as well as his impending bankruptcy. However, as the news story implies, Mr. Herzberg prefers to stay in his heavily mortgaged 'home' in California for as long as he possibly can, no matter who winds up paying for it in the long run - reference the 100 year mortgage comment (which won't happen) and the fact that when bankruptcies occur every other customer of the creditors wind up paying more than they really need to in order to subsidize the creditor's bankruptcy losses (which likely will happen), and every other homeowner will likely face a property tax increase to make up for lost property tax revenues. THAT is where the 'irresponsibility' lies.

    And, in all probability, that is also where the 'risk' lies for other residents of California, or Michigan etc. ... because once Mr. Herzberg and potentially tens of thousands of other people in the the same 'fictional' financial situation finally reach the end of their credit 'ropes', bankruptcies, foreclosure auctions, lower property values, and higher property taxes will soon follow ... which will 'tip' even more homeowners into an untenable mortgage situation like Mr. Herzbergs due to declining equity and higher property taxes making re-fi's impossible !

    !
    Last edited by Melonie; 12-12-2006 at 03:16 AM.

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    Default Re: further proof many Americans are financially irresponsible ...

    Quote Originally Posted by VenusGoddess View Post
    On the flip side...people are going into buying mortgages blind and uneducated. We use these ARMS all the time...and we never have this problem. We never will...we do the research and go from there. Part of the problem is that people are trying to buy homes that are too far out of their budget. Buy a home you can easily afford...and then flip it in two years (to avoid taxes) and move up.
    I agree with you VG, but in CA at least, most people really can't afford to buy anything unless they go with some creative financing. It would help if the morons would just stop buying and let the prices fall to reachable levels, but then the people who make money off this ridiculous market will do anything to avoid that too...

    Quote Originally Posted by pheno View Post
    When you lead a nontraditional life don't try to measure it with traditional milestones.

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    Default Re: further proof many Americans are financially irresponsible ...

    Ugh...
    I will never do that to myself. I agree with VG and Bridgette, I plan on buying a house in the spring and moving out of it within 2 1/2 years or so. Real estate is crazy over here right now, though, and I keep searching for something that is affordable, but it is hard.
    I scowl at paying more in interest than the worth of the home. I can't imagine living in a house for that long and still not paying anything towards the principle of the loan. I wasn't even aware that soooo much of this was going on! But here lies America, we have have the overly wealthy, and the greatly in-debted.
    With all the stupid things guys will say, stay cool.

    "Her apartment is littered with soggy G-strings and cheap 8-inch heeled shoes, along with empty tubes of body glitter, mascara, prescription drugs, zit cream, Aqua Net and Polaroid pictures of her and her "friends" engaged in some drinking and dancing on St. Patrick's Day last year. " My God....

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    Featured Member Vamp's Avatar
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    Default Re: further proof many Americans are financially irresponsible ...

    The reason why I also blame lenders is because in the past he wouldn't have qualified for a mortgage either.

    With the sub prime lending of mortgages, if they can squeeze you into a one with any kind of terms they will. They don't care if someone goes bankrupt anymore. They write it off their bottom line and continue. They act as if mortgages are giant credit cards. So the average consumer starts seeing them that way too. In the average consumer's mind if they're approved me then i must be able to afford it.

    The average consumer doesn't look at the over all picture. Our regulations no longer see the over all picture. Lenders could care less too. So who is being responsible with the level of credit (whether mortgage or credit card) available? If no one is watching out for the health of economy and no one takes any responsibility when the house of cards fall who will be left holding the bag? Consumers will. But the lenders and goverment will walk away with huge profits.

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    Default Re: further proof many Americans are financially irresponsible ...

    With the sub prime lending of mortgages, if they can squeeze you into a one with any kind of terms they will. They don't care if someone goes bankrupt anymore
    in point of fact, most mortgages are repackaged into mortgage based securities these days, and resold to one of the GSE's (i.e. Fannie Mae, Freddie Mac) or to private investors (most of which are foreign). Thus the mortgage originator gets their money instantly, as well as getting service fees to collect monthly payments on behalf of the mortgage backed security's new owner. Thus when the mortgagee goes belly up, it is the GSE's (translation - the US taxpayer) or the foreign investors that effectively must take the loss, and not the local mortgage originating bank/broker.

    However, with the rash of recent bankruptcies, local mortgage originating banks/brokers have been called on to 'buy back' mortgages they have recently repackaged ... those that went into default before the first payment was even received ! Additionally, federal bank regulators have issued new stricter guidelines re subprime lending and 'trick' mortgage creditworthiness criteria. Thus there will definitely be a reduction in these types of interest only or negative amortization mortgages in the future. However, this doesn't change the fact that there are a load of such mortgages already out there, with a high percentage of such mortgages ripe for default / bankruptcy as soon as the 'honeymoon' period expires.

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    Default Re: further proof many Americans are financially irresponsible ...

    Why blame the lenders? They are there for one reason and one reason only: to make money. They are not there to mollycoddle some financially irresponsible guy who is buying property he knows he cannot afford.

    You want someone to blame? Blame the morons who want property "so bad" in California that they would pay $600,000 for a $200,000 house.

    The reason people in CA need "subprime/predatory" lenders is because they are being foolish and buying homes for more than they are worth.

    They're screwing themselves because they are willingly paying 4-5 times more than the house is worth...knowing that they cannot "really" afford the house...and then start crying because they didn't read the fine print while signing legal documents on their house.

    The only person you can blame is the borrower...not the lender. If they would have done their research and had their lawyer read their docs...and made sure that they knew the FULL TERMS of the loan, they wouldn't be in this situation.

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    Featured Member Vamp's Avatar
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    Default Re: further proof many Americans are financially irresponsible ...

    Well if you know your financial history, there is more credit available today then there ever has been in the history of this country. We are also the deepest in debt than we have ever been before too. Just a coincidence? In the past this country had more oversight/ regulations about lending practices. We now have greater oversight about bankruptcies and less about lending practices. I think it should be balanced for both parties to share equal responsibility. Otherwise the econmy of this country will go down the toilet like it is.

    Of course the lenders are there to make money. But at what cost? The problem with business today is that social responsibility is seen as something done thru charities instead of how they practice business.

    Saying that people are just foolish to fall for it is equal to blaming the victim of a con-artist for being duped.

    Even Freddie Mac has a page about predatory lending on their webpage.
    http://www.freddiemac.com/corporate/.../predlend.html
    Combatting Predatory Lending
    Not all lenders who offer home financing to consumers play fair. In fact, some use unscrupulous practices to prey on people trying to achieve the dream of home ownership, or struggling to hold on to their homes. Predatory lenders often target low-income people, immigrants and the elderly as their potential victims.

    What is predatory lending?
    Predatory lending is any practice in which lenders try to fool or intimidate consumers into agreeing to loans that are ultimately unaffordable and do not meet industry standards. Predatory lending is illegal.

    Predatory lending practices involve some or all of the following:


    Offering only loans with higher interest rates than the borrower can afford

    Adding unnecessary fees to the cost of the mortgage

    Including "balloon payments" - a large one-time payment -- at the end of a payment schedule that disguises the true, higher-than-expected, cost of the loan

    Moving a borrower from one loan to another near the end of the payment schedule to extend interest payments and add to the overall cost of the loan

    Forcing borrowers to purchase more insurance than the law requires, and more than the borrower needs

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    Default Re: further proof many Americans are financially irresponsible ...

    Well if you know your financial history, there is more credit available today then there ever has been in the history of this country.
    well, that's not strictly true ... there was just as much 'easy credit' available to people who weren't really 'qualified borrowers' in 1929 - it just wasn't available in the form of zero equity mortgages. And the fit hit the shan in a big way in the fall of 1929 once the unqualified borrowers were called on to pony up cash or sell their leveraged assets at whatever price the market would bear once upward price momentum ran out of steam. Of course in 1929 the 'easy credit' terms applied to margin stock purchases, rather than real estate. However, the 'tin foil hat' crowd would tell you that today's housing bubble resembles the 1929 stock market bubble in many important ways, and that the end result is likely to be similar !

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    Default Re: further proof many Americans are financially irresponsible ...

    Quote Originally Posted by Vamp View Post
    Saying that people are just foolish to fall for it is equal to blaming the victim of a con-artist for being duped.
    So, the people who got "duped" in the Nigerian scams were "innocent"? No, they were high. The problem with your theory is that you are saying that people should not have to use their common sense. Common sense says that you research anything before you spend/send your money or give someone your financial information. Lenders are not responsible for holding someone's hand and saying, "Now, this deal sounds too good to be true...so you'd better think about it for a while." No, their job is to get the loan and make their money.

    It is the CONSUMER'S responsibility to read what they are signing...to be absolutely sure they know the full terms of their loan whether that means they get the loan or not. Every lender sends out a huge packet that details, fully, the terms of the loan that the consumer is looking to get. What do the VAST majority of people do? They open it up, their eyes glaze over, and they toss the packet off to the side. However, if they were to have sat down and read through the entire packet, they would have learned EVERY ASPECT of their loan before ever sitting at the closing table.

    The problem is not the lenders. The problem is that CONSUMERS are not being responsible with their money. They don't want to take the time to read through the information given to them, so they go by someone's "word" and then cry and complain that they were "scammed" or screwed when it wouldn't have happened had they taken their heads out of their asses and read up and researched.

    Who cares that there is more/less credit available today than 50 years ago? Just because someone shoves a credit card offer under my nose, doesn't mean that I have to take it. We got tons of credit card offers...and we sifted through them until we found the one that we were interested in getting.

    If consumers don't like predatory lenders/lending, then its high time that they learn how to read their pre-mortgage docs and learn to do their own research as opposed to just going along with what someone tells them.

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    Default Re: further proof many Americans are financially irresponsible ...

    The problem with your theory is that you are saying that people should not have to use their common sense

    The problem is that CONSUMERS are not being responsible with their money.
    Arguably, this is a direct outgrowth of at least 20 years worth of laws and court rulings which have protected people who failed to exercise common sense from negative consequences ... and in many cases rewarded them handsomely ... and at the same time forcing the business involved, other customers of that business, and/or the taxpayer to pick up the tab. From 'walk away clean' bankruptcies to the McDonalds coffee spill lawsuit to class action lawsuits against stock brokers which are now being solicited on TV, the implied message being sent is that consumers can be as stupid as they want but that, somehow, if and when their stupidity gets them in trouble the gov't will make everything all right (at the expense of the taxpayer, the business or other customers of that business).

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