So JP Morgan is proposing Interest Only loans

[AllentownJake]

as a solution to the foreclosure mess.

Forgive me for sounding naive, however don't we have a system already set up where you make payments and receive no equity?

I believe it is called paying rent.

[eleny]

1. They just don't want to give the little guy an inch

[AllentownJake]

2. They are insanely greedy

Foreclosure isn't cheap. If they can find a way to make Home Owners pay them a monthly rental fee and than not have to take on any of the legal responsibilities of a land lord they get a pretty good deal for themselves.

[TexasObserver]

3. Those who get such loans and keep their homes will appreciate them.

An interest only mortgage is a good way to keep many struggling homeowners in their homes. For homeowners, it means a great deal.

[AllentownJake]

5. No it is a horrible deal

You are a tenant with none of the legal protections of being a tenant. Your better off letting your house go into foreclosure and renting.

[TexasObserver]

9. It's a great deal. Ownership and leasing are two very different things.

Ask those who own a house if they'd rather keep it and have their note payment reduced to an interest only loan for a few years, or if they'd rather lose the house to foreclosure and then rent a place.

Most don't want to lose their home.

Lease payments protect only a leasehold, with no ownership rights. The interest only loan allows the homeowner to continue to own the home, with all the rights of ownership subject to the loan.

[AllentownJake]

13. It's awful for a home owner

I'll agree, no one wants to lose their home. However, taking a deal where you are responsible for all the maintenance, insurance, and taxes of the property while building no equity in the property is an awful deal for anyone.

In addition, I'm guessing this is being suggested to a large extent where houses are underwater. If you took the loan out in the past 5 years you are paying interest on a loan for an asset that isn't worth the amount of the loan.

[TexasObserver]

17. The homeowner knows what is good for him or her.

This is an option that is being made to those who are paying PRINCIPAL and INTEREST.

If you checked their loan amortization charts, you'd see that very little of their loan payments the first few years go to reduce Principal, so your supposition regarding equity building is a red herring. It's just not much of a factor the first five years of a 30 year mortgage.

Homeowners who want to keep their homes and think this kind of loan will help them can get it. Those who don't can keep their current home loans. Each homeowner will decide what they want to do, and the ones who opt for the interest only loan will do so because they don't want to lose their home.

[Angry Dragon]

26. I agree n/t

[TexasObserver]

65. And even if they don't, it's still their decision.

Can you imagine the arrogance of people who have never owned a home railing about a loan program designed to help real homeowners who already have principal and interest payments on their home?

It helps if one actually knows what homeownership is like. Most Americans want it, and those who attain it usually want to keep it.

[DireStrike]

28. And there will be no predatory practices involved.

And the consumers will be fully informed. All of them.

[TexasObserver]

32. These are consumers who already have loans with their lender.

Why can't you accept that most consumers aren't nearly as stupid as you pretend they are? Mr. and Mrs. Homeowner in America prefer having choices, and if they already have a principal and interest loan that costs them $1000 a month, getting to cut that number to $800 a month sounds pretty good.

I'm a Democrat, so I favor programs that help homeowners keep their homes.

[AllentownJake]

34. Every post on here I've seen

Has demonstrated to me that you love you some Wall Street. Not that concerned about Main Street.

[TexasObserver]

40. No, just the opposite. I loathe Wall Street. This IS about Main Street.

If you owned a home, you'd better understand why homeowners will appreciate this loan program.

I'm sure there are many who will jump on this program.

[AllentownJake]

53. I'm sure there will be many as well

Just as there were many who jumped into ARMs and bought houses with no principle. Doesn't mean its a good idea or a good thing for the long term financial health of the nation.

[AllentownJake]

29. Actually no they don't

Every piece of evidence over the past 3 years shows, that the Home Owner, Americans, People, do not in effect no what is good for them. If people knew what was good for them, than we wouldn't have had a housing bubble to begin with now would we.

See I guess this is where I get to be a capital D Democrat and you get to be a DLC corporate shill. Government occasionally needs to step into the marketplace and say, this is a bad idea. It isn't constructive and its predatory in nature. Interest only loans are predatory in nature.

You may argue, that in an amortization chart that interest is paid more than principle, you and I will agree. However when you make no payment to principle it is impossible for the chart to reverse in the future.

Here is what is going to happen in the real world, not the fantasy world you live in. A lot of people will pay these loans for a short while, than when something happens to the house that is expensive to repair (a broken water heater, a leaky roof,) or the homeowner faces some kind of financial stress again. They are going to walk away from the house. Because they will have only been renting to begin with, and that is what you do when you have trouble with your rental property.

If you argue price appreciation, with the inventory levels we have right now I'll laugh in your face.

So, like all DLC corporate shill solutions, bad for working Americans and covering up the problem, for the short term.

[DireStrike]

33. Thanks.

I wanted to say that, but I could not have put it as elegantly as you did.

[AllentownJake]

51. That was one of my better ass kickings

I must say. Thanks for appreciating it.

[TexasObserver]

37. They own a home and are working to pay for it.

They have responsibilities you do not have. They understand that they own a home, and with it comes responsibilities. They have to get up and go to work every day to pay for that home.

They understand that they can't simply move back in with their parents, so they make tough choices to stay in their home.

They know far better than you do what they need to do regarding their home loan.

[AllentownJake]

45. This proposal is a slap in the face of the American people

and it is a way for the bankers to avoid having to face tough choices. Just like repealing mark to market was a bad solution to a real problem, this is a bad solution.

Here is the deal. These houses are underwater, and instead of taking a loss by possibly renegotiating the principle or shaving a point off of interest this is the proposal these guys have come up with. It is the most profitable solution they could think of and it allows them to keep distressed assets on their balance sheets.

They are still in big, big, big trouble for their bad behavior over the past 3 years and encouraging homeowners to behave badly as well.

[TexasObserver]

54. Your desire to make their decisions for them is a slap in their face.

They're (1) a homeowner, and (2) gainfully employed.

Why would they choose you to make this decision for them? Don't you think they're much better equipped to determine what is best for them than you are?

[AllentownJake]

55. Some of them

Yes, I think some people are fully equipped to make this decision. Most of them, no. I believe a lot of people will make this decision under emotional duress and than end up regretting it and walking away from it.

Like I said, if people were making rational decisions in an unregulated market 3 years ago. Unemployment would be at 5% right now.

[DireStrike]

57. But it is not a good long term deal, and the homeowner is forced to take all the losses

Or as many as the lender can possibly leverage onto him or her.

Surely the losses are disguised as well as they can be. But they are there. It is a bad deal and the only reason to take it is if you would have nowhere to go when the house is taken.


losses being the loss of job, wealth, etc from the recession/depression. The bank's books will come out fine but everybody at the bottom will have to sacrifice.

[TexasObserver]

70. That's the homeowner's decision, not yours.

He or she or they know better than you what they can and cannot do.

They already a home and a loan. The question is whether that loan continues or they CHOOSE to refinance.

[AllentownJake]

73. This is a public policy decision

For someone who always talks about economic recovery and big picture, you sure have gotten all microeconomics in favor of the banks.

[TexasObserver]

76. No, it's the decision of each homeowner with an existing mortgage.

This is a loan refinance program for customers who already have loans.

You don't have such a loan, so it doesn't apply to you. It applies to homeowners who want to keep their home and would prefer to have a smaller note payment.

[AllentownJake]

77. This is a practice

That was banned by the government in the 1930s because it turned out to be a disaster. Now you can talk about your love of the homeowner all you want, but from your past post on here, I surmise you could give a crap about regular folks.

They are asking for regulatory approval to begin a practice that has not been done in this country since FDR made it illegal.

Call me crazy. That FDR guy was pretty smart and was extremely effective in putting a place a set of laws and regulations that led to 40 years of economic prosperity for the middle class till one by one each was overturned by people speaking of free markets and homeowners.

[JVS]

20. Nobody who gets such a loan keeps their home, the home belongs to the bank.

[TexasObserver]

21. That's utter nonsense. The home does NOT belong to the bank.

[Statistical]

4. Owner would still gain from equity apreciation.

In a 30yr fixed 6% mortgage you pay down the principle less than:
<2% in first 1 year
<5% in first 3 years
<7% in first 5 years

So if it avoids foreclosure and person stays in home long enough for economy to recover and then they refinance it isn't that bad of a deal.

Even better is if they allow them to keep same rate. On a 6% 30yr fixed interest only you could make it full amortized by simply making a single payment of $1200 (tax return) in the first year.

[AllentownJake]

11. and you'll lose all your equity appreciation

Making tax payments on your home while you are essentially renting, meanwhile forgoing all the legal protections you have in a tenant land lord relationship.

I can see why JP Morgan is proposing this, they are greedy assholes. I can't see why DUers are defending it.

[eleny]

27. A house always needs repairs and upkeep

In this market, that surely will continue for some time, the maintenance of a home could easily eat into the meager equity appreciation.

To me this is a naked, blatant money grab by the lenders one more time. A kind of disgusting "tough shit, chew harder, take it or leave it" move.

Every time I turn around I see a "Mr. Potter" scheming.

[dysfunctional press]

6. weren't interest only loans at least a part of what caused the mess...?

if people can't afford a traditional mortgage- they probably can't afford the house.

[Greyhound]

7. By giving in to their blackmail, we have lost all power and they have no longer have any fear.

Our government has shown them that they rule the nation.

Unless and until the American People elect a majority of representatives that represent them, we are lost.

(I suppose a revolution would work as well, but that seems even less likely)

[AllentownJake]

8. What amazes me more than anything

Are there people on here who are saying, "Well that might not be a bad idea." Pay the bank interest on the equity of a house, be responsible for all the repairs, maintenance, and taxes, and receive no equity.

I wonder some days why we are inching closer and closer to serfdom.

[Ardent15]

10. If serfdom comes, it will be because of the government being bought by business...

..not the other way around, as conservatives and libertarians claim.

[Gormy Cuss]

24. It probably isn't a bad idea for a subset of people facing foreclosure.

It's not a good idea as a blanket solution and shouldn't be proposed that way, but if someone with otherwise good credit hits a bump in the road and can't pay the current mortgage, a re-fi to an interest-only loan may give that person just enough breathing room to get re-established and then re-fi again in 2-3 years. Even with an interest only loan it's possible to build equity because of market appreciation. You're just not paying down the principal.

IMHO interest-only loans shouldn't be used as a way to buy a property in the first place for most people. I also think that no down payment loans should be pretty rare too. In both cases it seems like attempt to get someone into home ownership before the person has the financial security to swing it.

[AllentownJake]

31. Take market appreciation out of the equation

You aren't going to see significant market appreciation for at least 5 years unless we start bull dozing houses. Supply and Demand dictate that. You can't have market appreciation of an asset unless you make improvements when the class of asset has been overbuilt during a boom time.

[Greyhound]

35. The only reason the value of real estate hasn't already collapsed 90%

is the trillions of taxpayer dollars gifted to the banksters.

We eat the losses while they take all the profits, but socialism is eeevuuuullll!

[Gormy Cuss]

42. Done. Now look back at my example.

Someone who already has a few years into the property and would lose money in a sale today because of current market conditions. More to the point, someone who has ten years of paying PITI and has some equity built into the property but after sale would not be in a position to afford local rents nor to buy a cheaper property.

The equation then becomes one of calculating the cost of the excess interest paid in the next few years vs. the long term gains assuming the owner re-fis again to a conventional mortgage with principal payments + interest.


eta : Again, it may only be worth it for a subset of current owners and most certainly shouldn't be a primary tool for preventing foreclosures. Some people will be better off losing the house than taking on a perpetual interest-only mortgage.

[AllentownJake]

47. There is a very small subset of people

that this may work out well for.

You and I both know, that the guys who are selling this solution aren't targeting that small subset.

[Gormy Cuss]

56. That's where regulation comes into play.

I don't know who Morgan is targeting (couldn't find a link with details) but the regulators could certainly act to limit eligibility for this product. I'm all for tossing Gramm-Leach out the window and returning to the comfy Glass-Steagall regulations. You know, back when getting approved for a mortgage actually meant something.

[AllentownJake]

59. Mortgages should be

20 years, require a 20% principle up front, and have a set interest rate. If interest rates go down and you have good credit you can refinance.

Absolutely vanilla mortgages and we will never have this problem again.

[Gormy Cuss]

78. The problem isn't nonvanilla mortgages. It's more about securitized mortgages.

If the originator had to hold the note the standards for mortgages would tighten up overnight.

[AllentownJake]

80. That too

You tend to be a little loose with the rules when you won't be the one holding the bag during a default.

[ipfilter]

46. I would use one of these loans and hardly think twice about it.

Think about it. If you pay principle and interest on a mortgage you slowly build equity that is locked into your illiquid real estate. You have the equity but you have a hard time accessing it if you need it. OTOH, if you only pay only interest on the loan and save what would have gone to principle you still have that equity, because you saved it and you could apply it towards your mortgage if you wanted to, and it is liquid and accessible in the event of an emergency.

[AllentownJake]

48. Seeing that this loan

Is being marketed towards people who are about to go into foreclosure, what do you think the chances are that they have your plan?

[DireStrike]

63. These people will not be "saving" the principle that they are no longer paying.

They will be eating it.

In some financial circumstances this is a good deal... provided it can be terminated at will by the renter. For the vast majority, and for people who can't afford to hang onto their homes, it is a way to extract as much as possible without destroying the serf's ability to continue producing that stream of wealth for the lord.

[ipfilter]

66. It's not renting.

You buy a house and use a loan to purchase it your name is on the deed. It's yours. The bank can't just take it without suing you. The mortgage is just a document filed at the county pledging your property as collateral in the event you default on the note.

That being said, if a person can refinance to an IO loan and the reduction in principle payment is enough to keep them from financial armageddon who should stop this? It's not predation on the part of the bank to offer such a loan. The bank is just offering a financial tool.

I guess I'm not understanding the indignation here.

[AllentownJake]

71. The practice was banned 60 years ago

Because, in theory everything you say is true. What ends up happening in reality isn't good.

[Warpy]

12. Uh, that's called RENTING

Since you never pay the principal, you never really get to own the property.

[TexasObserver]

14. That's not true. It's not even close to renting, which confers no ownership rights.

If you own a home, you have the right to make changes to it, the right to sell it, and if you make more on sale than the debt, you have a right to those additional proceeds. Whether you have an interest only loan or a standard loan that pays both principal and interest, your ownership rights are the same. The only thing that changes is the remaining principal on the loan, which is constant with an interest only loan, whereas it gradually reduces under a standard principal and interest loan.

You do own the property, from day one, and you continue to own it until you either sell it or have it foreclosed on.

[AllentownJake]

16. There is a reason this practice has been banned

As there are reasons Glass-Steagal was enacted, we had usury laws, etc. etc. etc.

[TexasObserver]

18. No it hasn't been banned. It's perfectly legal.

Usury laws are about levels of interest rates, not use of interest only loans.

These loans will be in the 5-6% range, far from any usury level in this country.

[Warpy]

38. You get to perform the maintenance and pay the taxes and insurance

and, if your economic circumstances deteriorate and you default on the payments, you get to be nailed with the entire balance due, meaning bankruptcy.

You're right, it's not like renting. It's far, far worse.

[TexasObserver]

44. Yes, it comes with the same ownership rights and duties it always has.

The question here is whether a consumer (1) continues to pay principal and interest on their loan, or (2) converts to an interest only loan, or (3) walks away and loses the home to non payment.

Each homeowner will decide which to choose, all without consulting you. And they won't care what your opinion is. They'll refinance because that's the choice they pick.

These are people who already have homes and home loans. The already know what homeownership entails.

[AllentownJake]

15. It's a great deal for JP Morgan

They get to be land lords without the responsibility of maintenance, insurance, or taxes.

[JVS]

19. Mmmm, debt bondage

[AllentownJake]

23. and the usual suspects loving it

[geek tragedy]

22. This is what got us into the mess in the first place.

Ugh.

[TexasObserver]

25. If each homeowner decides whether to get such a loan, that's their choice.

Homeowners see this differently than non homeowners. Those who wish to remain in their home, but who worry about making their loan payment, have another option. It will help some homeowners keep their home.

I can't believe there are people at DU who seriously oppose giving struggling homeowners the chance to get an interest only loan for a few years. We're FOR the homeowner. I don't what is going on with those here who want to deprive homeowners of this option.

[AllentownJake]

30. You sure are a fan of Predatory Lending

[Greyhound]

39. One of our greatest cheerleaders for fucking everybody below himself on

the economic scale.

[AllentownJake]

69. The DLC sure has done a good job

of creating a big tent.

[TexasObserver]

72. The DLC has no role in this dialog, unless you're in the DLC.

I'm a Democrat. We favor programs to help Americans keep their homes.

I don't know what party you think you're representing, but it's not the Democratic party.

[AllentownJake]

74. FDR banned this practice

I'm sure you know that.

[TexasObserver]

49. They're not predatory loans.

Interest only loans for 5% are not predatory, particularly when they're refinancing of existing mortgages.

If you understood what constitutes predatory loans or usury, you might be employable in that field.

[DireStrike]

62. Predation is not a small set of legally defined things.

It is anything that enriches the larger party against the interests of the smaller party.

[Nikki Stone1]

43. The actual solution is to refinance homeowner's mortgages @ more reasonable rates of interest

The bank takes a loss on an outrageous rate of interest triggered by an ARM, but they still make a reasonable profit; the homeowner gets to keep the house and keep paying toward the principle; neighborhoods get to retain property values. Mothers and children don't get thrown out into the street, producing a nation of homeless, poverty stricken families. It's a win/win.

Offering an interest-only loan is loansharking, and a desperate family might choose it to keep a home, but will be actually be lengthening the debt noose.

[TexasObserver]

61. Lenders want to refinance, and prefer that to calling loans for default.

These ARM loans that are set to roll over have to be dealt with. Allowing debtors the option of refinancing at a low rate with interest only for some period of time allows those homeowners to stay in their homes and avoid foreclosure.

The problem with discussing this topic on this board is that far too many posters want things that are simply never going to happen. There are too many houses whose loans are underwater, and the only things that will fix that are time, some inflation, and some jobs returning.

[rucky]

36. Isn't that what got us into this mess in the first place?

What's wrong with these people?

[AllentownJake]

41. They are greedy assholes

and people are desperate to hold onto something, they probably shouldn't have bought in the first place.

[JVS]

58. If you think the old setup was bad, this is worse.

Under this kind of system any loss in home value means that the mortgage holder is "upside down". There is no more equity for them to lose as a deterrent to defaulting.

[Ganja Ninja]

50. I think we should do the opposite of what they want.

Stiffen the usury laws, ban adjustable rate mortgages and cut the number of years a loan can be amortized to only 20 or 25 years. We could also put an extra tax on vacant bank owned homes to encourage them to sell at a more reasonable price.

[yurbud]

52. how about no interest loans since they are loaning you money out of thin air?

they get to pull it out of thin air and we have to pay it back with the sweat of our brow.

It seems to me they are making 100% profit if we just pay back the principal.

[Statistical]

64. That is not how fractional reserve works. Try reading it helps.

[yurbud]

81. they can loan out multiples of their deposits

If you have one dollar and lend two, when you get paid back, you've made a a dollar profit, minus administrative costs even if you don't charge interest.

Isn't that correct?

[LoKnLoD]

60. If you are in your home for less than 5-10 years

If you are in your home for less than 5-10 years 90% + of your mortgage payment is interest. They are all front loaded. If you can't afford to make your mortgage payment now, then you aren't going to be able to afford a interest only loan because it will basically be the same amount .

[wizstars]

67. my grandfather used to call it "buying a dead horse"

Any time you pay interest to a lender, you basically get nothing for the money. Just like buying a dead horse. It's idiotic. Borrowers, beware. Does anybody really think the lenders have the borrowers' interests at heart?

[AllentownJake]

68. A few on here appear to think so

crazy isn't it.

[PVnRT]

75. Link?

[AllentownJake]

79. Here you go

http://www.bloomberg.com/apps/news?pid=20601103&sid=aBnddzF.B8zw