A Two Beer Conversation About a Friend's Interest Only Loan Kicking Into a ARM: Mortgage Payment Almost Doubles
Yesterday, I completed a run out on the new South Roosevelt seawall. It was quite humid, but looking into the clear waters lapping the wall, I saw many fish and sea urchins which helped me take my mind off the heat and pain.
Once my run was complete, I decided to grab some take out to eat.
I made my way over to this new restaurant, Dante's at Conch Harbor. When I walked up the stairs, there was literally no one there except for a few bored employees and maybe 6 customers.
I thought to myself, "These guys spend thousands a week on half-page ads in the Citizen. They are never going to make it."
Before I had run in to the place, I had seen a friend of mine from a bar located half a block from mine walk into P.T.s. When I exited Dante's, I beelined into P.T.'s.
He sat at the uncrowded bar. I sat next to him. We exchanged cordial greetings. He and I have never spent anytime together outside our respective work places. Like me, he works late night hours (he was going to work yesterday and stoking up on P.T.'s food) and I decided to keep him company as he ate.
This guy is in his mid-30s.
We got to talking about a couple of DJs who had moved on from his bar, guys I either trained or opened the door to by giving them shots in the DJ booth.
During the midst of our conversation I learned that one of the guys used to be my friend's co-owner of his house.
I said, "You own a house in the Keys?"
My friend said, "Yeah, but it's more like it owns me."
He went on to explain: When he and this former DJ/Friend of his decided to buy a house 50/50 ownership, they were hooked by a local mortgage company to use an "Interest Only" loan in the first 3 years of the loan.
He told me $4,000 was the initial monthly mortgage payment.
The home is a three bedroom house with a guest cottage out back.
When the DJ lost his job, this guy I was talking to bought out the interest of the now impecunious DJ.
How to Make Your House Payment Without Losing Your House
During the first 3 years of the loan, this bartender I was talking too had made 36 payments of $4,000 without a single penny going to the payment of principal. For those who can't do the math, that's $144,000 in payments over three years made to a lender so you can call yourself "Homeowner".
Recently, the IO part of his loan kicked into an ARM.
As hinted in the title, his new payment . . . some of which goes to paying off the principal of his loan . . . has skyrocketed to $7,250 overnight.
Understand, this is a bartender in a bar which has its busy moments on the weekends (he has seniority and works the lucrative weekends) but this is also a bar which is not busy on many other nights of the week. At best, my guess is this guy probably tops $1,250 to $1,500 a week in tips on good weeks. And his bar is no longer the busiest bar on Duval Street as many newer bars (a bar in my bar's entertainment complex is beginning to eat into his business).
Furthermore, numbers shown on the Chamber of Commerce website show two years of declining cruise ship and airport arrivees coming into Key West.
And to top this off, the fewer tourists coming to town . . . (I call them Harley Defecit riders) . . . have fewer bucks to spend and our trickle down economy just isn't hitting on all cyclinders like it was for the past 15 years of "letting the good times roll."
So, my friend is working in one of those famous Key West Bars which is suffering from declining numbers and tourists with less pocket change.
He gets no paycheck from his bar.
Yes, he gets $3.00 an hour, but due to IRS regs, he is taxed on the amount of sales he registers every night at a 10 or 15% gratuity rate (I can't remember what he said), so he's never received a paycheck yet for more than 0.00 cents.
Do the math.
This guy makes about $5,000 to $6,000 a month in tip money.
That will not be enough to make his mortgage payment. And this fellow has to eat, buy insurance, buy gas for his scooter, buy consumables such as toothpaste, contact lenses, etc.
So, with his back against the wall, he did what most homeowners will not want to do to save their homes: he rented out rooms.
His small guest cottage rents for $1,150 a month.
His rooms rent out for a little less than that.
He's got four roomates, little privacy, and is working to pay off the man.
If his house does not appreciate (it has lost value since he bought it 3 years ago) at a faster clip than inflation (which the government says is clocking in at about 3% or a few basis points below), this friend of mine is basically renting money so he can add the title "Homeowner" next to his name.
By the way, he tried recently to lower his payments with a refi loan. No one would help him out, despite one bank (First State Bank) advertising everywhere they have $250,000,000 to lend.
I would not wish this $7,250 payment on others I know, but I feel this is the way it is going to end for many . . . or worse.
p.s. Today I am calling an aquaintance of mine out in Washington state who specializes in Mortgages.
As I stated in an earlier post of mine, two of my co-workers have IO loans - both of which are $4,000 a month at this time. Neither have seen their ARMs kick in, but I know for a fact if their payments rise to $7,250 it will crush them both.
As it is now, one of my co-workers is suffering under the yoke of a $4,000 IO monthly mortgage payment. She is the one who told me a few weeks ago that she is working so much to pay off her "peeeeemp" (i.e. pimp in her best Argentinian English) and as I explained in my blog post, the "peeeeeemp" is her condo she co-owns and is, like almost every property in the Keys, losing appraisal value every month.
This lovely lady has just split up with her boyfriend with whom she co-owns this overpriced condo.
The boyfriend still lives in the condo. It's in his name as she could not have established credit to buy it on her own. She is an honorable person who refuses to walk away from her debt that she told another human being (her ex-boyfriend and her lender) she would pay. But weighing on her mind is the fact she's lived in this condo for what seems "forever" and she's never paid one penny to pay down the principal of her loan. And now her loan is for a mortgage on a condo which is depreciating every month . . . like most condos all over South Florida. And the ARM has yet to kick in.
Her problem is she wants to get out from this loan. The boyfriend is paniced. He wants to sell the condo before the ARM kicks in, or at least get a refi that he can afford.
The condo is now appraised $100,000 less than when they bought it . . . and similar condos are actually selling for $160,000 less at this time. What they are looking to do is a Short Sale back to the their lender.
There is another big problem too: their lender was not a bank in the Keys. Their lender was one of these "chop shops" which sell loans as a 3rd party. Their lender has probably already sold "the paper" of her loan to a big New York bank. Furthermore, that bank has probably sold different tranches of this paper to hedge funds and private investors. So how does one trace the entity who actually holds your mortgage if different portions of it were sold here, there and everywhere? I don't know. I have no idea how any of this Short Sale or refi stuff works under these new ways of spreading risk from mortgage lenders.
What are the chances of this lady getting a Short Sale or a refi? I'd say as much chance as a snowstorm in Key West.
So what can this gal and her ex-boyfriend do? I have no idea. I'm not in the mortagage lending business. So I will call a pro.
Stay tuned, I'll let you know if I find any solutions from my friend in Washington.
