As we await Frannie’s latest mortgage-mod plan, David Streitfeld has news of the dire mortgage situation in Mountain House, California — a new town where all the houses were bought since 2003 and as a result 90% are now underwater.
The Martinezes bought their house in early 2005 for $630,000. It is now worth about $420,000. They have an interest-only mortgage, a popular loan during the boom that allows owners to forgo principal payments for a time.
But these loans eventually become unmanageable. In 2015, Mr. Martinez said, his monthly payments will be $12,000 a month. He laughed and shook his head at the absurdity of it.
That’s beyond absurd — in fact, I don’t even see how it’s possible. If the Martinezes are just paying their interest payments every month and don’t have a negative-amortization mortgage, then the total amount they owe won’t rise above $630,000, even assuming they took out a 100% mortgage. Paying $12,000 a month on a $630,000 debt is the kind of interest rate normally associated with credit cards, not mortgages: there’s something very funny going on here.
Even if they do have a neg-am mortgage, such loans don’t allow you to capitalize interest payments for a full decade. So if somebody can show me a mortgage product which would result in a $12,000 monthly payment on a $630,000 loan, I’d be very interested to see how it was structured. And to see who on earth would sell such a thing.
Still, there are moments of comedy even in articles such as this:
Kenny Rogers, a data security specialist, moved into Mountain House last year, buying a foreclosed property on Prosperity Street for $380,000. But the decline in values has been so fierce that he too is underwater.
He has cut his DVD buying from 50 a month to perhaps one, and is waiting until the Christmas sales to buy a high-definition television.
Waiting until the Christmas sales to buy a high-definition television — now there’s hardship for you.
Update: BirdDog, in the comments, says he can get there with a 10/20 interest-only mortgage at 8%. I can’t. Putting a $630,000 principal amount at 8% into my mortgage calculator generates monthly interest payments of $4,200. Then, after ten years, you pay down the principal in 120 equal monthly installments of $5,250. Add a $4,200 interest payment onto that, and you still only get to $9,450.