Mortgages? I just don't get it.

[justgamma]

Watching HGTV. A couple signed a no money down, interest only loan, with an adjustable rate mortgage. Ok, i thought these people are going to be in trouble. I've seen this several times though. They also immediately sign a 2nd mortgage.
What the heck is the second motgage for? Why would anyone let them have a second mortgage when it's obvious that they don't have collateral for it? Is this what led to all the problems we're having with foreclosures?

[TechBear_Seattle]

1. The reason they got the second loan in three words: high interest rate.

When the economy was booming, such immediate second mortgages were mere excuses to loan money at usarious rates. It gets called a mortgage, has first claim to equity from the first mortgage being paid off and (best of all for the lendor) is fully guaranteed by the US Government against default as a mortgage. The advantage to the new home owner was that they had a home, and now had money to fix it up and/or furnish it.

These kinds of loan practices are exactly why the meltdown has occured now that the economy is bombing.

[ipfilter]

2. A lot of people were taking out these toxic 1st mortgages

for 80% of the purchase price and using the second to finance the remaining 20%. It allowed them to avoid mortgage insurance, finance 100% of the home, and made the banks a lot of money in fees.

[sinkingfeeling]

3. In some of the 'first time buyers' shows, they were taking out 1st. mortgage on 80% of the

purchase price and a 2nd. mortgage for 20% of the price to avoid the mandatory PMI. And they did it with no money down!

I have noted that most of the shows were filmed in Nevada and in 2006. Would love to know how many still have those homes.

[Citizen Number 9]

4. If this show is recent,

Maybe the lender feels that their income is very secure. If that's the case, maybe they're just a couple who found a house they wanted very much and are willing to put themselves in debt up to their eyeballs in order to get it right now as opposed to waiting and coming up with a downpayment to make their new home more secure

Maybe.

If the show is older, I'd say they were betting on the expectation that home values were not going to stop rising, so they could have equity without actually having to do anything except take a risk.