Monday, July 30, 2007

ARMed and Dangerous

I'm speaking of Adjustable Rate Mortgages. In my lifetime, I can recall three housing boom/bust cycles, and right before each headlong crash, ARM's crawled out of the woodwork and started gnawing away at people who should never have been able to buy homes but were suckered into it by predatory lending practices. These people didn't have the money or the financial stability to afford a house, but some land shark of a salesman talked them into signing their financial death warrant in blood. ARMS are to mortgages what loan sharks are to personal loans. A BAD IDEA.

Another nasty suprise also comes when the first year's escrow account is recalculated for the next year. Many of these same lenders that would have no qualm selling you a mortgage who's interest rate goes stratospheric within 3-5 years also have no qualm about using the assessed value of the property back when it was still a cow pasture for tax purposes instead of the sales price they are selling it to you at. The result is that the escrow account is purposely short come the next year by a huge margin. The mortgage co, tells you that not only do you have to pay what they estimate your taxes will be for the coming year, but you have to pay the back taxes and insurance for the prior year, PLUS you have to pay interest and penalties. Then to top it off, you have appraisal creep steadily raising the amount of your taxes year after year after year. Then in a couple years not only are you trying to figure out where the money for the taxes is going to come from, now you have to worry about that 10-15% interest rate you are suddenly assessed. If you are lucky, you might be able to refinance it to a fixed rate or sell it before the crunch comes, if you are not lucky, you may find yourself stuck with a mortgage and a tax bill you can't afford and a house that is no longer worth what you owe against it because the housing market has taken a nose dive. you can't refinance it, you can't sell it, and you can't afford it. Now what are you going to do?

I propose that Texas, which has a longstanding history of protecting homeowners from doing stupid things and putting their homes in jeopardy as a result, outlaw these predatory lending practices (intentional escrow account manipulation, and adjustable rate mortgages.) that dupe unsuspecting borrowers into getting in over their head.


Blogger Jean said...

I'm all for less government, but I can definitly see your point. The problem is, though, is that our legislators are probably bought by the realtors and lending institutions that promote these nefarious lending practices.

I'm glad my home is paid for.

August 01, 2007 9:15 AM  

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