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We’re going nuts over this story in today’s Los Angeles Times. The reporter, David Streitfeld, always finds fascinating people to illustrate trends in the housing market, and he’s done it again with this story, called “A Loan That’ll Get Ugly Fast.”
Streitfeld talks to a guy named Will Hertzberg who owns a home in Corona and pays the minimum payment on his mortgage every month. But that minimum payment is less than half of the interest that accrues every month, and so Hertzberg’s debt is growing. (That option is called negative-amortization; you can read some of our coverage of the phenomenon by clicking here or here.)
Hertzberg got caught in the home equity-tapping game, when homeowners refinance their original mortgage and borrow against the appreciated value of their homes.
“Free money always has the unfortunate effect of making people go overboard,” said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump’s “How to Get Rich.” “You’d be surprised how fast $190,000 can go.”
The money wasn’t really free, of course. It just seemed that way, the result of a radical shift during the last decade in how people view their homes.
“Homeownership has become like auto leasing, where the price of the car doesn’t matter,” said Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. “All that matters is the size of your monthly payment.”
Read the story, and make sure to get all the way to the end. The kicker quote is unbelievable.