I have seen several stories recently exploring the risky, but popular, "interest only" mortgage loans that people are using to buy a more expensive home and pay less per month. The reason the monthly payments are lower is that, for a time, the homeowner just pays interest, no principal. The risky part is that buyers are betting that the value of homes will continue to escalate and a lot of voices are warning that one day, maybe soon, the bubble will burst. Of course there are many voices who assure that there is no housing bubble.
Here is a story from The Associated Press about interest-only loans:
Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don't require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan.
But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of a crash that could plunge the economy into a recession.
"When this market adjusts, it's going to be painful," said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. "Borrowers are getting in over their heads, and lenders are too."
The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios -- in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association.
Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.
"Borrowers are becoming much more educated and smarter about what a mortgage really is," Carrington said. "They are using it as just another investment tool in their overall financial plan."
San Francisco accountant Patrick Duffy advises his clients to use interest-only mortgages, unless they plan to live in a home for at least seven years. "If you are only going to have it a short time, why waste your money" on the higher monthly payments required under a conventional 30-year mortgage, reasons Duffy, who financed both his homes with interest-only loans.
The Washington Post included a short piece from a mortgage banker who speaks in favor of the loans. Here is another cautionary story from Boston.
Forbes includes a piece on interest-only mortgage loans, too. The Forbes story is a good bit more dire than the others, saying:
During the second half of last year, 63 percent of home loans were adjustable-rate mortgages with those so-called interest-only features, according to the Mortgage Bankers Association.
When something gets this hot, the smart money should know that's when the trend is over. But while, for a long time, the parlor game where bankers gather may have been guessing when the home-price bubble might burst (see "Real Estate Vulnerability Index"), now the worry has shifted to the role of interest-only mortgages. These give borrowers lower upfront payments for a few years, then balloon into far bigger installments when principal payments kick in.
Property Tax Revolt
Given what is happening to property values and the rapid pace of sales, counties and cities may be making a haul in taxes. At the same time, there is a national push for states to adopt caps on how much property taxes can increase per year. The Christian Science Monitor reported:
Across the country, homeowners are waging revolts as property taxes post massive gains. Faced with these protests, legislatures are considering ways to provide relief:
- Besides implementing a two-year cap on property taxes, Nevada is studying a constitutional amendment that would change the way property taxes are figured.
- Maine is picking up a larger share of education costs, which may lower property taxes.
- Voters in New Jersey are trying to force a constitutional convention that would reform property taxes. The State House has to authorize the convention.
"Almost every state is looking at some form of property-tax cap," says Myron Orfield, an expert on property taxes and a law professor at the University of Minnesota in Minneapolis. "It's a 'perfect storm' for property taxes: There are rapidly increasing home values while states are not keeping up with their contributions to school districts."
The talk of a real estate bubble is causing additional angst because many homeowners are afraid that their taxes may be based on a market value that no longer exists. "If northern Virginia is any guide, when it does burst, no local government is going to trim spending.
"They didn't when the value of their housing stock dipped in late 1989 and 1990," says William Ahern, a spokesman for the Tax Foundation in Washington.
Some are particularly concerned about the impact of rising home values on the elderly and those living on fixed incomes. Michigan, for example, this year increased the eligibility for a tax-deferral program on the basis of income. "They are expanding homestead exemptions that may or may not be based on age," says Bert Waisanen, a fiscal analyst at the National Conference of State Legislatures in Denver.
Use It and Lose It Insurance
Last fall, a big windstorm blew our basketball goal onto the hood of my 12-year-old truck. My wife said that we should call our homeowners insurance company. I stopped her, fearing that a claim would send our rates soaring.
I think a lot of us live that way, paying our premiums but afraid to use insurance fearing that it will be canceled or our rates will rise.
A story on CNN Money says insurance companies may even keep a file on you if you just call them to ask if you can submit a claim.
One hundred thousand Floridians have been shed from insurer's rolls, and it goes far beyond Florida as CNN reported:
Non-renewals by insurance companies is a trend that's affecting homeowners far beyond the hurricane belt. A 2003 study by the Independent Insurance Agents & Brokers of America (IIABA) revealed that nearly 2.5 million Americans had lost their coverage during the previous two years.
Non-renewals follow two scenarios: The first involves homes in danger zones, such as flood plains or storm paths.
A recent example took place in late May in Laguna Hills, Calif., where a hillside collapsed, destroying 18 expensive homes and damaging others. Homeowners in such danger zones may lose their coverage whether they have made claims or not.
The second involves policyholders who file too many claims, the so-called "use it and lose it" phenomenon.
"It has been a very strange development," says Doug Heller, a spokesman for the Foundation for Taxpayer & Consumer Rights. "Consumers are being threatened with non-renewal for filing legitimate claims."
"The companies say, 'We'll take care of you,' " says Marcia Salkin, senior policy representative for the National Association of Realtors. "But if you let them do that, it can come back to bite you."
One couple recently told Heller they had been loyal clients of 17 years when their insurer dropped them after they filed a claim for a burglary. That came a few years after a pocketbook theft.
Oddly, the couple never received a dime for the burglary because their loss turned out to less than their deductible. But claims don't have to be paid -- or even filed -- to count against you.
Just asking your agent whether a loss is covered could go on your record.
"The use it and lose it problem is pervasive, affecting more than 40,000 Californians a year," says California Commissioner of Insurance John Garamendi.
If a homeowner's policy lapses, it can put the owner into mortgage default, says Salkin. Banks may then insist on "forced-placed coverage," which is provided by insurers of last resort willing to take on more risk.
That coverage can be pricey, three times or more above what's typical.
Casey Center Winners
Here are some stories that are worth a look. The Casey Center posted the 2005 winners for meritorious journalism. The Casey Journalism Center focuses on coverage of children and families.
High Power Phones Interfere with Airlines
My friend, WTKR (Norfolk, Va.) investigative reporter Mike Mather, spotted this tip that some of you may be interested in. Air traffic controllers in Miami and Cleveland are reporting that somebody using high-powered, illegal cordless phones are interfering with radio frequencies that aircraft use. The phones appear to be based in the Bahamas and in Michigan.
We are always looking for your great ideas. Send Al a few sentences and hot links.
Editor's Note: Al's Morning Meeting is a compendium of ideas, edited story excerpts, and other materials from a variety of websites, as well as original concepts and analysis. When the information comes directly from another source, it will be attributed, and a link will be provided, whenever possible.
