International Investing

The LA Times describes a home owner using this toxic waste:

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.

A second possibility is to pay $2,279, which would cover only the interest.

But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

Obviously that cannot continue indefinitely. The article estimates about 1 in 5 loan applications in California got one last year, this year is on pace for 1 in 3 to use them.

Washington Mutual Inc., which has one of the nation’s largest portfolios of pay option loans, said 47% of its borrowers in this category last December took the minimum option.

This only pushes out the day when the whole system blows up. For the profiled home owner it occurs when his loan amount hits 115% of the original loan. This day is still two years away. When it does occur his monthly payment will go from $1,106 to a staggering $2,848 per month.

The bleak picture finishes off with what ones hopes is a lame joke attempt: Hertzberg always looks at these fliers, hopeful in spite of himself. “I’m waiting for a 100-year loan,” he said. “My heirs can worry about paying it off.“