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An
integral part of the American Dream is homeownership. In 2004, Barbara
Davis (pseudonym) purchased her first home in a suburb of Atlanta.
Davis purchased her little dollhouse for $140,000, which required
piggyback loans. The first was an interest-only loan for $113,000 at a
rate of 4.75 percent. The second was a $27,000, fixed-rate, home equity
line of credit at an interest rate of 9.75 percent. This lending
practice is used when buyers don’t have enough money for the down
payment, which generally is 20 percent of the home’s value. Private
mortgage insurance (PMI) is additional insurance that is required for
buyers who make a smaller down payment. PMI payments can be dropped
once the buyer’s equity exceeds 20 percent of the home’s sales price or
appraised value. Davis’ interest-only loan expires in less than a year
and she’s growing concerned over news reports highlighting the downturn
in the housing market. She’s wondering if she’s a victim of the
ill-fated subprime loans that have generated so much media coverage –
and if she’ll one day wake up to an eviction notice.
Go
figure. Davis’ annual salary is $35,000. She qualifies for annual
raises that range from $.90 to $1.20 per hour. She doesn’t own stock,
but she participates in the retirement program offered by her employer.
Davis’ monthly mortgage payment is a little over $827.00. She’s single
with no kids, a few credit card bills, and no car payment. According to
bankrate.com, the best candidate for an interest-only loan is someone
whose income is mostly in the form of frequent commissions or bonuses;
someone who expects to increase their income in a short period of time;
someone who truly will invest the savings between an interest-only
mortgage and an amortizing mortgage, and who is confident that the
investments will make money. According to her profile, Davis isn’t a
good fit for this offer.
There are a number of individuals, like Davis, whose bliss suddenly
mutates into a nightmare. Homeownership is quickly becoming the basis
of strife and stress for many families facing foreclosure or
bankruptcy. Homeownership rose steadily from 64 percent to 69 percent
between 1994 to 2004, according to statistics compiled by the Federal
Reserve Bank. That’s equivalent to 12 million homeowners. The Center
for Responsible Lending’s “Losing Ground” study projects that 1 out of
5 (19.4 percent) subprime loans issued in 2005-06 will fail, leading to
foreclosure. Making matters much worse, the IRS holds you liable. Even
though the debt is cancelled in foreclosure, ejected homeowners are
still responsible for taxes, penalties and late fees. Wake up, America.
It’s time to modify “The Dream” to fit your reality. – yvette caslin
