Sunday, February 10, 2008

Floating Loans are Subprime Variety

Are Indian borrowers, borrowing for their dream homes, setting themeslves up for a mortgage trap without even knowing that they are?

I recently got a call from a large lending organization pushing me a "floating" scheme, saying it had no fixed EMI scheme on offer! I had to either take a floating scheme or have none at all.

It is exactly these floating kind of schemes that have had many borrowers lose their homes in the US.

The current subprime mess in the US is attributed to AMTPA, a 1982 law.

Before AMTPA, banks were barred from making anything but the conventional fixed-rate, amortizing mortgages. However, in 1982, AMPTA lifted those restrictions, giving birth to all the new and exotic mortgages that have so many borrowers in a bind.

The various schemes are:

  • Adjustable-rate mortgages (a norm in India), in which the interest rate become floating after a number of years.
  • Balloon-payment mortgages, in which you pay very little in the beginning but (like in a balloon, the payments get outsized as they year goes by. For anyone in a job, you want payments to reduce as you retire, not increase.
  • Interest-only mortgages, which require only repayment of interest (not principal too) during the first few years of the loan, only to hit borrowers with crushing monthly-payment resets once the new monthly payment kicks in.
  • Option-ARM, considered the worst, which allows borrowers to keep borrowing even the interest to be paid, during the first few years. This is worse than than borrowing from a local money lender because "the interest on interest payments" gets tacked onto the size of the loan. So your Rs 300,000 mortgage can turn into a Rs 350,000 loan in a hurry, destroying any equity you have in your home.





Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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