Tuesday, October 31, 2006

Hitting Home

As I was driving home yesterday, I was listening to the Randi Rhodes Show on Air America and she was talking about the economy and interest rates and how many people are starting to have difficulty meeting their adjustable rate mortgage payments as interest rates rise. Now intellectually, I've known this was happening for some time, but hearing the people that were calling in to her show really made it much more concrete for me. People were calling in from all over the country - Florida, Michigan, Washington. All were telling similar tales - they got an adjustable rate mortgage or an interest only mortgage and over the past couple months, their payments have risen steadily, in some cases more than doubling, leaving them with payments they can't meet. And most stories had another common thread. Real estate agents had encouraged them to buy as much house as they could afford. Mortgage brokers had pushed interest only mortgages or, worse, negative amortization mortgages to get them the lowest monthly payment. Very little, if any, time was spent explaining what would happen if interest rates went up and it was just assumed that the value of their houses would continue to follow the recent trend of exponential growth, leaving them free to refinance any time in the future.

With declining property values, they are now trapped in a mortgage they can't afford to keep and can't get rid of. Add rising medical and medical insurance costs to the mix, and you've got people who are in serious financial straights.

Most disturbing was the fact that these weren't all financially stupid people. I mean, there were some who you could tell didn't have a basic grasp of economics, but there were a surprising number of self-employed people, white collar workers, and educated, middle class people facing these problems.

Randi suggested that interest only and negative amortization loans should be outlawed. I don't believe that interest only mortgages should be outlawed; as a real estate investor, I know they have their usefulness. But I can't really think of a good reason why negative amortization mortgages shouldn't be, apart from the generic opposition to having more government invention in our lives.

I don't have all or even some of the answers for how to fix this, but I do know that, as a real estate investor, I can help these people. As the real estate market drops, now is the time investors can make money but at the same time, I don't think we should be so concerned about profit that we hurt these people even more. We have the ability to create a win-win situation that helps these people and lets us make a fair profit at the same time.

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