The housing market is seriously screwed up. Housing is just too expensive particularly here in California and other hot spots. Now the classic economic supply/demand solution is that if housing becomes too expensive, people will not be able to afford to buy, demand goes down and so do prices. There seems to be a small problem: Banks are now offering "exotic" mortgages so people can buy homes that they can't afford:
Welcome to the high-stakes world of the negative-amortization loan. With skyrocketing home prices in America’s hottest markets, lenders have become increasingly creative in their efforts to stretch consumers into pricier homes.
Interest-only loans, nearly unheard of three years ago, have jumped in popularity. “IO” mortgages, which come in many shapes and sizes, can shave 20 to 30 percent off monthly payments because they temporarily relieve borrowers of the need to pay any principal. But after that temporary reprieve, mortgage payments jump sharply. Fully one-third of mortgages opened last year were interest-only loans, causing a stir of concern among economists including Federal Reserve Chairman Alan Greenspan.
But interest-only loans seem conservative compared to the latest lending rage, the negative-amortization loan. Consumers who sign up don’t even have to pay the full interest owed the bank each month. Instead, they borrow more money as time goes by, making minimum payments in a way that echoes the world of revolving credit card debt. In a housing market that goes suddenly flat, such a loan guarantees the buyer will be “upside down” after a few years — meaning their home will be worth less than the mortgage on it.
If the market changes, and it always changes, a whole lot of people are going to be screwed with these loans.