It is my sad duty to inform all readers that this blog is retiring as of today. Our editorial priorites have gradually changed here at Weblogs, Inc., and while we are glad to have published in this space, the time has come to concentrate our resources elsewhere. As usual with our retired blogs, the Mortgages Weblog will remain visible and accessible, an archive of the excellent posts it holds. Thanks to everyone for reading!

(For fresh blogging about investing news, head over to the dynamic BloggingStocks.)

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It is my sad duty to inform all readers that this blog is retiring as of today. Our editorial priorites have gradually changed here at Weblogs, Inc., and while we are glad to have published in this space, the time has come to concentrate our resources elsewhere. As usual with our retired blogs, the Mortgages Weblog will remain visible and accessible, an archive of the excellent posts it holds. Thanks to everyone for reading!

(For fresh blogging about investing news, head over to the dynamic BloggingStocks.)

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There’s been quite a bit of talk over the exotic loans and their affects on homeowners’ equity lately. The more “leveling” we see in home values and prices over the next few years will have a great impact on how the loans will affect the borrower, and their ability to pay off the mortgage. Combine the “correcting” home values with the lack of payments toward the principal amount, factor in the borrowers’ stretched incomes, and you have a recipe for disaster.

The interest only or I/O loan was originally set up and geared towards someone who is financially set and well prepared for the purchase of a home. However, many borrowers “stretched their buying power” with the interest loan, using the bulk of their monthly income to pay the mortgage payments. People who would not otherwise have qualified for a loan - instantly became qualified. The changes and adjustments that the rates may bring, added to the fact that many of these loans are in areas with inflated housing prices, may cause many homeowners to lose their homes and walk away with nothing due to lack of equity built up during the I/O period.

I watched a home go from $250K skyrocket to a range of $450k to $500k in just two years, then “corrected” back down to $350,000 in just a few months. If during that time a buyer “stretched” their buying limits to afford the home at $450k, in less than six months they are owing $100,000 more than the home can sell for, and with rising rates - possibly a mortgage they are no longer comfortable with. Of course, don’t forget - there’s relatively no equity built up in the first few years, and none for the first 10 years if the borrower obtained an interest only mortgage. Just a hypothetical - yet very real example.

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There’s been quite a bit of talk over the exotic loans and their affects on homeowners’ equity lately. The more “leveling” we see in home values and prices over the next few years will have a great impact on how the loans will affect the borrower, and their ability to pay off the mortgage. Combine the “correcting” home values with the lack of payments toward the principal amount, factor in the borrowers’ stretched incomes, and you have a recipe for disaster.

The interest only or I/O loan was originally set up and geared towards someone who is financially set and well prepared for the purchase of a home. However, many borrowers “stretched their buying power” with the interest loan, using the bulk of their monthly income to pay the mortgage payments. People who would not otherwise have qualified for a loan - instantly became qualified. The changes and adjustments that the rates may bring, added to the fact that many of these loans are in areas with inflated housing prices, may cause many homeowners to lose their homes and walk away with nothing due to lack of equity built up during the I/O period.

I watched a home go from $250K skyrocket to a range of $450k to $500k in just two years, then “corrected” back down to $350,000 in just a few months. If during that time a buyer “stretched” their buying limits to afford the home at $450k, in less than six months they are owing $100,000 more than the home can sell for, and with rising rates - possibly a mortgage they are no longer comfortable with. Of course, don’t forget - there’s relatively no equity built up in the first few years, and none for the first 10 years if the borrower obtained an interest only mortgage. Just a hypothetical - yet very real example.

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Many homeowners around the world are turning to home equity loans, and home equity lines of credit, and even their IRAs and 401(K) funds to decrease or eliminate their credit card debt. Partly fueled by the recent growth in home equity and home values, partially due to lower interest rates on home loans, thousands of people per day are shifting their debt from their cards to their homes. While in some cases this can be beneficial, there are some very real hidden dangers to be aware of when chosing an option that involves taking from your home equity.

One thing that many borrowers are not aware of - or are chosing to ignore - is the definite possibility of homes in your area experiencing a “leveling off” of home values. While over the past few years the equity seemed to grow at an unreasonable rate - without much effort on the part of the borrower, that same equity could essentially disappear just as quickly. In addition to leveling home values, most ARMs are scheduled to begin to reset as early as 2007, and many homeowners will find themselves with a much higher monthly mortgage payment. For those who have a large enough monthly income to compensate for the higher payments, the jump in interest rates may not have as severe of an effect. But most borrowers will experience payment shock - even without adding in the credit card debt, and have a hard time with the monthly payments.

If a borrower has a low monthly payment now, and a higher than normal property value - it can cause a false sense of security, and lead to choices that would not otherwise be made based on the equity in the home. One of the most important thing to remember, is that there are collectors paid to collect on the credit card debt, and by not making the monthly payments on the debt - you could have your cards taken away. When you struggle to pay your monthly mortgage payments, the price is much higher - you could eventually lose your home. Taking the extreme risk of paying off credit card debt may seem like a wise decision due to the difference in interest rates between credit cards and mortgages, but weighing your options as well as the risks may save your home. And the biggest danger of all?? Most Americans who use their home equity to pay off their credit card debt refuse to change their habits and lifestyles, and actually see their zero-balance cards as an invitation to go shopping - perpetuating the cycle. However, in this cycle, there is one detrimental factor - home values will probably not continue to experience the rise, leaving the borrower with very few recovery options for the future.

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Many homeowners around the world are turning to home equity loans, and home equity lines of credit, and even their IRAs and 401(K) funds to decrease or eliminate their credit card debt. Partly fueled by the recent growth in home equity and home values, partially due to lower interest rates on home loans, thousands of people per day are shifting their debt from their cards to their homes. While in some cases this can be beneficial, there are some very real hidden dangers to be aware of when chosing an option that involves taking from your home equity.

One thing that many borrowers are not aware of - or are chosing to ignore - is the definite possibility of homes in your area experiencing a “leveling off” of home values. While over the past few years the equity seemed to grow at an unreasonable rate - without much effort on the part of the borrower, that same equity could essentially disappear just as quickly. In addition to leveling home values, most ARMs are scheduled to begin to reset as early as 2007, and many homeowners will find themselves with a much higher monthly mortgage payment. For those who have a large enough monthly income to compensate for the higher payments, the jump in interest rates may not have as severe of an effect. But most borrowers will experience payment shock - even without adding in the credit card debt, and have a hard time with the monthly payments.

If a borrower has a low monthly payment now, and a higher than normal property value - it can cause a false sense of security, and lead to choices that would not otherwise be made based on the equity in the home. One of the most important thing to remember, is that there are collectors paid to collect on the credit card debt, and by not making the monthly payments on the debt - you could have your cards taken away. When you struggle to pay your monthly mortgage payments, the price is much higher - you could eventually lose your home. Taking the extreme risk of paying off credit card debt may seem like a wise decision due to the difference in interest rates between credit cards and mortgages, but weighing your options as well as the risks may save your home. And the biggest danger of all?? Most Americans who use their home equity to pay off their credit card debt refuse to change their habits and lifestyles, and actually see their zero-balance cards as an invitation to go shopping - perpetuating the cycle. However, in this cycle, there is one detrimental factor - home values will probably not continue to experience the rise, leaving the borrower with very few recovery options for the future.

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With so many Americans living with a false sense of security (called home equity), it’s no wonder that spending has risen to an all time high. If it’s not the pressure to take out a home equity loan to pay off credit card debt, there’s the pressure of wanting the big kid toys like boats, cars, and oversized electronics. But what has fueled this excess spending? In part - inflated home values - in which homeowners can borrow money against their equity. The problem is, in some areas of the country, the equity in their homes is due to a temporary “bloating” of the value. This equity used to be viewed as security for the retirement years, but more and more individuals are watching their equity dwindle away while experiencing the rising debt on their home, and payments extending into their golden years. In a world where reality TV is a new form of entertainment, it’s like watching a high-stakes game of “reality Monopoly”.

Here’s just a brief example I was able to witness in my lifetime: A home was purchased around 1970 for a price in the $40k range, and a 30-year mortgage with a monthly payment of around $80. By the mid 90’s, the home was nearly paid off, but the car was getting old. The logical solution seemed to be at the time to take out a home equity loan, and buy a new car. Why not - it was becoming an increasingly popular way of obtaining the things that would otherwise not be affordable. Several years later, another new car, then an expensive sewing machine, and finally - a cruise with friends. Today - the home is valued around $300k, and the total monthly payment is in the range of $700. Not one of the more extreme examples, but a great example of the way homeowners view their home equity as a checking account - rather than a savings account.

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With so many Americans living with a false sense of security (called home equity), it’s no wonder that spending has risen to an all time high. If it’s not the pressure to take out a home equity loan to pay off credit card debt, there’s the pressure of wanting the big kid toys like boats, cars, and oversized electronics. But what has fueled this excess spending? In part - inflated home values - in which homeowners can borrow money against their equity. The problem is, in some areas of the country, the equity in their homes is due to a temporary “bloating” of the value. This equity used to be viewed as security for the retirement years, but more and more individuals are watching their equity dwindle away while experiencing the rising debt on their home, and payments extending into their golden years. In a world where reality TV is a new form of entertainment, it’s like watching a high-stakes game of “reality Monopoly”.

Here’s just a brief example I was able to witness in my lifetime: A home was purchased around 1970 for a price in the $40k range, and a 30-year mortgage with a monthly payment of around $80. By the mid 90’s, the home was nearly paid off, but the car was getting old. The logical solution seemed to be at the time to take out a home equity loan, and buy a new car. Why not - it was becoming an increasingly popular way of obtaining the things that would otherwise not be affordable. Several years later, another new car, then an expensive sewing machine, and finally - a cruise with friends. Today - the home is valued around $300k, and the total monthly payment is in the range of $700. Not one of the more extreme examples, but a great example of the way homeowners view their home equity as a checking account - rather than a savings account.

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There are many types of mortgage fraud, but to raise awareness about this extremely rampant crime - we all need to be aware of the different types of fraud that are used. As one of our readers pointed out, there are FBI agents that are currently pursuing individuals and groups who are not only committing crimes with full intention of defrauding their customers, but they are also actively investigating common documentation “errors” that can be construed as mortgage fraud.

While not all mortgage professionals are intentionally participating in criminal activity, the only way to stop the “mistakes” that can lead to criminal prosecution is to become truly educated in the mortgage process, and make sure that all the documentation is correct and complete. It is extremely important that the lender or broker provide copies of ALL documentation.

As a consumer, the best protection that you can give yourself is education. Read all documentation BEFORE you sign. Don’t just trust that your mortgage broker or lender is going to be completely honest with you. Remember - their paycheck depends on the outcome of the transaction. If you feel uncomfortable, don’t give in to pressure, you must feel comfortable with every aspect of the purchase, and may even be in your best interest to have an attorney go over the documents before you sign. If you are put into a position in which you do feel overly pressured, there may be a problem - there may be a hidden agenda that is in the works, and you have every right to take some extra time to read through the disclosures and the documents that you are signing. The key is education - so if you don’t understand something, ask questions until you do.

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There are many types of mortgage fraud, but to raise awareness about this extremely rampant crime - we all need to be aware of the different types of fraud that are used. As one of our readers pointed out, there are FBI agents that are currently pursuing individuals and groups who are not only committing crimes with full intention of defrauding their customers, but they are also actively investigating common documentation “errors” that can be construed as mortgage fraud.

While not all mortgage professionals are intentionally participating in criminal activity, the only way to stop the “mistakes” that can lead to criminal prosecution is to become truly educated in the mortgage process, and make sure that all the documentation is correct and complete. It is extremely important that the lender or broker provide copies of ALL documentation.

As a consumer, the best protection that you can give yourself is education. Read all documentation BEFORE you sign. Don’t just trust that your mortgage broker or lender is going to be completely honest with you. Remember - their paycheck depends on the outcome of the transaction. If you feel uncomfortable, don’t give in to pressure, you must feel comfortable with every aspect of the purchase, and may even be in your best interest to have an attorney go over the documents before you sign. If you are put into a position in which you do feel overly pressured, there may be a problem - there may be a hidden agenda that is in the works, and you have every right to take some extra time to read through the disclosures and the documents that you are signing. The key is education - so if you don’t understand something, ask questions until you do.

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