Anybody on an "exotic" mortgage?

[solarbird]

Do you have an exotic (interest-only/negative amoritisation/"payment option"/etc) mortgage or a teaser-rate payment you rely on? Are you thinking you'll just refiance it later to save your ass when the rates go up, like the housing bulls have been saying?

If you're one of the people who fell for that, prepare for severe p0wnage. New Federal lending guidelines are shutting your plans down circa... now. The new guidelines came out a few weeks ago, and they're taking effect. Jessie at Mortgage News gives one example of how these escape hatches are being bolted shut.

We will use this example: Qualifying at 2.00% start rate or fully indexed 7.625% based on $8,000 gross monthly income and $800 in revolving debt.

Mortgage Qualifying Differences:

at 2% Maximum Mortgage: $432,878
at 7.625% Maximum Mtg: $226,055

So using the numbers in this example, if you financed, say, $300K at in some sort of exotic mortgage - one based on the interest-only payment, teaser-rate payment, flex-payment, or other non-equity building schema - then you will not qualify for refinancing that amount now. You'll be stuck with whatever loan you've got, and if you can't make the payments, well, we all know where that leads, particularly with the 2005 bankrupcty law changes. The link above talks a bit more about how that ends.

So: any light-of-day you might have seen in this week's housing report - and there wasn't much, despite the "the housing slump has bottomed out" coverage seen in some of the press - is now gone, by which I mean snuffed, by which I mean, if you're in this situation, you are screwed. They are in ur house taking ur furniture.

Anyway, here's a direct link to the new Fed guidance paper so you can read the raw details - it's a PDF. The first link above doesn't even talk about some of the secondary instruments that are being affected here - for example, the simultaneious second-lein loan, where you borrow a "down payment" amount from one bank and a primary mortgage from a second bank. This sounds like something you'd have never imagined anyone doing, and yet it's actually disturbingly common, particularly in commercial lending. These are now expected to be handled more stringently too, even if they are in the form of traditional mortgages. Investor loans are subject as well - referring to purchasers of rental properties, and any remaining housing specultors who haven't realised that game is over yet.

So, if you had those kinds of plans in place and you didn't already bail yourself out, well - time to start making alternative plans. Good luck!

Comments

[partywhipple.livejournal.com]

Hrmmm. You really went at this both guns blazing, huh? Considering you might be giving some people heart attack level of surprise/shock I think you might be a bit more gentle. Luckily, oh thank you GOD, I have a good mortgage so they won't be taking my house any time soon. \

Also, and this is important, the housing market DOES suck right now. Incredibly. So no bank is going to make shit off seizing the house of someone with this type of mortgage, they will probably lose money. And they know that. So anyone with this type of mortgage should try and refinance through the bank which holds their initial loan. And there are other things which can protect them from losing their homes including state guidlines in some places which protect home owners. Don't hang yourselves yet.

[solarbird]

I'm actually being kind by not pulling punches here. Some lenders will be a little behind the adoption curve. Also, there are some small lenders which may not yet be affected by the new guidance - see comments in the PDF. So there may still be a chance for people to make other arrangements that don't suck as hard. But if there is, it probably won't last very much longer - at best, it's a matter of weeks, not months.

I had words to that effect in the post originally, but yanked them back out because I didn't want people to get to that part and go, "eh, okay, it's no big deal, I have time." No, they don't.

And congratulations on having a sane mortgage. We do too. Yay, fiscal sanity!

[partywhipple.livejournal.com]

It was freaking blind luck I had a good one. Lots of Equity in the house so they had to give me a good deal or I'd go elsewhere, you know?

[solarbird]

Well, whatever works. Taking the good fiscal sense deal when you get the opportunity counts for something. ^_^

[firni.livejournal.com]

I wouldn't even get an ARM, let alone one of those other loans. I'm far too paranoid.

[epawtows.livejournal.com]

I feel so old fashioned. Went for a 30-yr mortgage, 10% down, with mortgage insurance (long since canceled the PMI). Daniel did the same (his PMI was just canceled last month).

[ellerisse.livejournal.com]

I didn't know I could have gotten anything else. o.O I guess I'm glad I didn't. XD

[wrog]

it occasionally annoys me that one can't do short sales of real-estate the way one can do short sales of stock.

Or maybe it doesn't; I suppose I would have lost my shirt by now waiting for the crash.

[solarbird]

Were the opportunities not so rare (1930s, now) then a way would probably have been invented. ^_^

[dogemperor.livejournal.com]

And it is THIS, boys and girls, why I am SOOOOOOO thankful that me and hubby were able to get in at 5.5% fixed rate when we bought our house (we stayed away from ARMs like the black plague--EVIL, I tell you, EVIL--and were able to get the fixed rate by going through the state mortgage corporation as first-time homebuyers and buying an older home (actually, one of my requirements was a house 50 years old or older--none of those chipboard and Tyvek McMansions in an HOA and CC&R-restricted neighbourhood that were twice as expensive and will probably blow away in a stiff wind in ten years). I know for damn sure we couldn't get anything that good now.)

[dogemperor.livejournal.com]

(Of course, I'm also thankful that I live in what is one of the few areas of the country NOT in a housing bubble. Not too much of one in Kentucky, even in the big cities.)

[backrubbear.livejournal.com]

I was very cautious when I bought my house a few years ago to go for something "boring". I was able to do a proper downpayment, get a sane interest rate for 30 years *that wouldn't change*. The people who went for the "I don't know what I'll be paying in the future" mortgages were just crazy.

[solarbird]

There's a place for variable-rate loans; there are sane ones, for example, with caps (in both directions) which means you are taking a bit of a gamble, but a limited one. The insane loans are the ones which do not build equity - that's just crazy talk. Similarly, a "teaser rate" isn't a bad thing in and of itself, as long as you base your ability to handle the loan on the regular rate that kicks in once the teaser rate expires. That can save you some good money. However, as this letter shows, banks have been basing the total loan amount available on the teaser rate in this scenario, which is back to, you know, insanity.

[cow.livejournal.com]

huh. I totally missed this post the first time around.

*checks calendar* OH I WAS IN JAPAN. OKAY.

Anyway, I ran the numbers using that site's new mortgage calculator. Based on the interest rate I got at the time (on a 30-year fixed! yay!), I could have afforded 150% of what I bought. Hooray for not being in over my head, even under the new standards. :D