Sunday, September 20, 2009

Time ARM Bomb - Silicon Valley Style

Time ARM Bomb - Silicon Valley Style
Calculated Risk picked up on this article.

What I don't understand about Mr. Amacker's story is why he would add 2 bedrooms and 1 bathroom to his home when he was only living with his two sons. I wonder if the loan exceeded the cost of the addition? Inquiring minds want to know. (house details at bottom)

2009-09-20: $30 billion home loan time bomb set for 2010
Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages.
Joey Amacker of Newark, who works as an account manager for a catering company, refinanced his home with an option ARM for $624,000 so he could pull out money to build an addition. The friend who sold him the loan assured him that an option ARM was a safe and affordable product, he said.

Amacker said he initially made only the minimum monthly payment of $1,800, which covered part of his interest and none of the principal. The amount he owed grew to $660,000 by November 2008, according to loan documents.

Meanwhile, payments that would cover both interest and principal also escalated above his reach, said Amacker, a single father of twin teenage boys. Although he wanted to pay more than the minimum, "it was a struggle, borrowing from Peter to pay Paul," he said. His 21-year-old daughter moved in to help out, and he rented out the addition he'd built. But he couldn't keep up with the payments. He's been trying to get his bank to modify the loan, but says it doesn't get back to him. The bank did not respond to a request for comment.

Between the negative amortization and his missed payment and penalties, Amacker's total debt has ballooned to $725,000, while the house is probably worth about $500,000, he said.

"I feel so ashamed of how I could have gotten myself in such a bad situation," he said.

Like Amacker, most option ARM borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

6589 Fountaine Ave, Newark, CA
5 beds, 3.0 baths, 2,070 sq ft
Zestimate®: $548,500

Sale History
02/16/2001: $425,000

What in the hell did he create? (click image to enlarge)


AuAgPb said...

I have zero, zip, nadda sympathy for idiots that get nailed by these Options ARMS. How are people this damn stupid? Now we have FHA becoming the subprime lender and Barack and his cast of idiots want to loan 125% again. This country deserves all the pain coming its way.

Mike said...

I personally find the whole system of govt support of private asset markets such as real estate ridiculous and a huge waste of time and money. I agree with those who say that there should be no Fannie and Freddie, and that the govt should allow the buyers and sellers to determine prices on their own. This would avoid the series of booms and busts that we are now experiencing. And it would also prevent the misallocation of capital to nonproductive govt organizations that do not provide a productive purpose.

Our banking system should also not be set up in a way such that a 20% decline in nationwide home prices could threaten the collapse of the entire system. Falling prices are part of the normal business cycle, but the Federal Reserve has mismanaged things for so long that they never allowed prices to adjust in a normal recession, so that now the adjustment process is more severe.

I agree with AuAgPb about the pain coming, and a lower standard of living for most Americans. This is the result of reckless govt spending and huge fiscal deficits because the political system allows for huge conflicts of interest between the short term desires of elected officials and the long term healthy of the country. So for the average person I think one of the few ways to protect him or herself from these issues is to invest in some gold related assets, because gold should continue to rise due to the Fed's policies to avoid any form of deflation. I recently read some good articles on these topics at that I think are useful for investors to check out. They discuss in detail the unintended consequences of all the money printing, as well as the potential impact on the dollar, the gold price, and the prospects for the global economy.