CHESSNOID

The New York Times has a great article titled “The House Trap” where people took out teaser loans to leverage the maximum loan value to purchase their dream house.  Unfortunately,  the house values fell dramatically for many of these people before they could refinance and now are stuck in the loans they initially took out.

NY Times:

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

This is an issue that will not go away and will continue to hurt the economy. We have had our government bail out Wall Street and bankrupt banks with taxpayer money, create a stimulus package that has had no effect, and continues to blow up the national deficit.  Until the housing bust issues that originally caused the Bush-Obama Recession are dealt with, the economy will not fully recover.

Interest-only loans are not the only type of exotic mortgage hanging over the housing market. Another big problem is homeowners with “pay option” loans; in many of these loans, principal balances are actually increasing over time.

Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.