Taxation & Estate Planning

The Oracle of Oak Park?

By Joel A. Schoenmeyer

I know predictions are a fool's game, but I can't help but toot my own horn about this October 2005 post:

The Risky Business of Crazy Mortgages

Cybele Weisser has a scary article entitled "Crazy Loans: Is This How the Boom Ends?" in this month's Money magazine -- it's available online here. Speaking anecdotally, I've definitely noticed more and more homebuyers who are stretching to buy homes via "creative" financing. As Ms. Weisser points out, "crazy loans" could have a huge effect on those who hold them and on the economy as a whole.

What does Ms. Weisser mean by "crazy loans"? A few of the major types:

-Interest-only: For a set period of time at the beginning of the loan, the borrower pays only interest.

-Long-term fixed: Instead of the typical 30-year fixed mortgage, the mortgage is for 40 or 50 (or more) years.

-100% financed: The principal of the mortgage equals the purchase price (using one mortgage or a primary mortgage with a home equity line of credit).

-Flex-payment ARM: The borrower chooses what to pay each month, and may even pay less than the interest due (in which case this amount is added to principal).

If home prices continue to increase and interest rates stay low, most of these borrowers will be OK. But what if home prices don't increase and/or interest rates begin to rise?

Full post as published by Death and Taxes Blog on March 12, 2009 (boomark / email).