Housing Doom

We’ve been up half the night with Igor.  Seems he’s heard rumors that the hedgies and big investment banks have discovered that CDOs and and MBS might contain actual mortgages.  Now he’s afraid real life might be on the verge of invading Doom Castle!

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New readers of HousingDoom.com may not know that I am a serious student of fantasy and the real estate market. By this I don’t mean delusion, like the present nutty and suicidal fad among first time buyers in the UK and Northern Ireland to try to earn down payments by speculating [1] on new-build condos in places like Cyprus. We’re talking real, actual, hard-core fantasy here.

In the course of my first trip down the rabbit hole, in late November of last year, the subject was Anshe Chung, RE’s first virtual millionaire. After consulting with my brother, an internationally recognized fantasy expert, I learned that Second Life, the virtual world that served as the platform for Chung’s valuable but totally imaginary real estate empire, was inspired by the 1992 dystopian Neal Stephenson sci-fi novel Snow Crash. By that time Second Life had already become commercialized much as Stephenson had foreseen, and this article [2] in Sunday’s Toronto Star documents just how fast the process has spread in just the last three and a half months.

The Chung story demonstrates an instance of so-called "real life" invading the domain of fantasy, but the present story goes the other way around. This time it’s fantasy encroaching on real life.

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Kudos to Henry Savage, president of PMC Mortgage, who wrote about those "fabulous offers" in the mortgage flyers that clutter the front door.  He describes a flyer he received:

 

• "30 Year Fixed, 1.95%" (In big bold letters at the top of the letter)
• "Our Rate Reduction Loans can provide you with a 30-year fixed rate of 1.95% …"
• "… you can save $1,764 every month …"
• "My company believes that honesty … is the only way to develop life long mortgage customers … ."

What an amazing deal!  Here’s what the flyer said on the back:

"Initial Annual Percentage Rate (APR) for a 30 year mortgage loan with 80% loan to value is 4.981%. Rate is fixed for 12 months and adjusts upwards 7.5% of the payment amount annually for the first ten years of the loan."

Even Savage, who is in the business, is puzzled:

Let’s see … the letter twice touts a 30 year fixed rate of 1.95 percent. But the fine print estimates the initial APR at 4.981 percent and reveals that the rate is only fixed for the first 12 months, adjusting "upwards 7.5% of the payment amount annually … ."

Savage decides to call the ad and check it out.  After receiving the run around, he determines the following:

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