Thursday, May 12, 2005

Depression Era Loans Back In Style

The professor who wrote this BankRate editorial isn't against interest only loans, but he makes a compelling case for abolishing them. "Interest-only mortgages were the standard mortgage in the 1920s, but they disappeared during the Great Depression, and for good reason."

"The drop in real estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since."

"The big change in the risk of IOs, relative to the '20s version, is their attachment to adjustable-rate mortgages, or ARMs. ARMs are risky in themselves because borrowers are exposed to rising mortgage rates when market rates increase. Adding an interest-only feature heightens the risk."

"Adding an interest-only period to ARMs opened the door to a variety of merchandising gimmicks based on an ingenious piece of misdirection: IOs are presented as a new type of mortgage, with lower rates than standard fixed-rate mortgages."

11 Comments:

At 12:40 PM, Blogger Nayrab said...

Am I wrong when I read articles like this one and I salivate a little bit.

I have a feeling there's going to be some real bargains in the next couple of years. I can't wait until rates start rising and the I/O and ARM crowd starts getting squeezed.

Of course I feel sorry for the little guy, not the greedy flipper.

Have to dry off my keyboard......

 
At 12:45 PM, Blogger bubbleman said...

interest only loans are a great tool for people who are responsible with their money. however, these loans are not being used in this fashion and are simply a marketing tool for realtors and mortgage brokers to get 'suckers' into their'dream' homes. for instance, 50% of all loans in CA in 2004 were interest only - in 2001 that number was around 5%. what does that tell you? the fact that prices in CA continue to climb through astronomical levels only illustrates the problem. obviously the combination of big al's low rate policy coupled with these aggressive loan products has created this over inflated market.

 
At 12:48 PM, Anonymous Anonymous said...

Don't want to kill your greed-buzz, but who's going to buy/rent these "bargain" assets from you?

In the last recession I recall people teaming up and renting apartments (I shared my teeny 1-bedroom with two other roommates!). So it's not like demand will suddenly appear just after you snapped up some discounted properties. It may take decades to get back to the prices we see today. I mean, look at Japan.

 
At 12:50 PM, Blogger deb said...

The thing I don't get, is how it is spun as positive that home prices are rising at levels that far exceed incomes. Why is it good for a country that more of it's capital should have to be devoted to housing and its citizens strapped with a lifetime of debt? I feel like I have gone through the looking glass into some kind of bizzaro-world.

 
At 12:56 PM, Blogger John Law said...

all this proves is that nothing in the financial world ever really changes.

 
At 12:56 PM, Blogger Nayrab said...

Yes, you are right. Greed is wrong, no matter how you look at it. I shouldn't stoop to the level of so many already in the market.

Really though, I am sick of renting and prices seem to be going up by the month. I just want to pay a middle class price for a middle class home, without being upside down in a year or two.

My dream neighborhood is from the Tom Hanks movie, "The Burbs".

 
At 1:07 PM, Blogger bubbleman said...

i was in a lawyers office yesterday and we were talking about ca real estate. an accountant friend of the lawyers was saying that she could not believe the number of people who were living well beyond their means by purchasing these 1 million + homes. and these were people making 150K a year....tick, tick, tick,.....

 
At 1:37 PM, Anonymous Anonymous said...

(i was in a lawyers office yesterday and we were talking about ca real estate. an accountant friend of the lawyers was saying that she could not believe the number of people who were living well beyond their means by purchasing these 1 million + homes. and these were people making 150K a year....tick, tick, tick,.....)

Those are probably the 2nd biggest credit risk, behind speculators with poor credit ratings. They are the wannabes. They really value money and want to keep up with the neighbors. Those are the ones who just MUST lease that BMW.

I'll enjoy watching them flame out.

 
At 3:01 PM, Anonymous Anonymous said...

These overleveraged buyers are going to be squeezed by rising gasoline and heating fuel prices, too. Even if one is not a peak oil believer, there are more signs each day of tighter energy supplies (check www.energybulliten.net ). The reason for West Coast LNG ports is that we will need that gas. And the more square footage you got with 3% down, the more you'll pay for heat and cooling.

I agree with anon 12:48 that people will be doubling up, but I think the market for smaller single-family houses will do better than the average.

 
At 3:03 PM, Anonymous Anonymous said...

Make that http://www.energybulletin.net/index.php

 
At 3:05 PM, Anonymous Jim in Venice said...

"Those are probably the 2nd biggest credit risk, behind speculators with poor credit ratings. They are the wannabes. They really value money and want to keep up with the neighbors. Those are the ones who just MUST lease that BMW.

I'll enjoy watching them flame out."

As will I .... hopefully it will be a gory spectacle as I live in Los Angeles, birthplace and home of the wannabe. I will pull up in my 1991 Honda Civic, wearing my clothes from Robinson's May, and buy their houses with a 50 percent down payment that I saved up while they were paying the interest on their inves...err... homes.

 

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