- May 25, 2002
- Professional Status
- Certified Residential Appraiser
Cruel Jokes, and No One Is Laughing
WHAT do banks call it when a troubled borrower abandons her home, sending them the keys?
And what do they call it when an irate borrower abandons his home, yanking electrical outlets from walls, leaving faucets running and otherwise trashing it on the way out?
“Taking the inside of the house with you.”
There’s nothing like black humor to define — however sadly and starkly — the blows that keep on coming in this mortgage debacle. But make no mistake, lenders are only beginning to learn how to manage the onslaught of jingle mail and houses turned inside out.
Investors, homeowners and regulators have greeted the new year hoping that the worst of this financial nightmare is over. Some investors may even view Bank of America’s planned bailout of Countrywide Financial last week as a sign that it is safe to wade back into financial services stocks.
But while other economic crises over the last decade were resolved relatively quickly and cleanly — the Mexican peso mess, the Russian debt debacle and the dot-com implosion — the unraveling of the great home mortgage boom is significantly more complex. There are infinitely more moving parts to this problem, and it will take far longer to right.
For example, while it is widely known that a wave of subprime adjustable-rate mortgages, or A.R.M.’s, will reset this summer — raising the specter of further foreclosures — an even more troublesome mess involving pay-option adjustable-rate loans lies well beyond that. These are the kooky loans that allowed borrowers to make payments that were a fraction of the interest owed, without paying back any principal.
Only when the loan balloons to 15 percent larger than its original size — a nifty development that results from a multisyllabic quagmire known as “negative amortization” — do lenders demand that borrowers pay down principal. In many cases, this will cause borrowers’ monthly payments to double, according to analysts.