American Dream turning into Nightmare?

"Falling prices trap new homebuyers: Neighbors in a new Garden Grove tract say a developer's plan to slash prices by about $140,000 has left them owing more for their homes than they're now worth." has a rather sad and sobering quote:

Dunn said he's in a financial bind because he's using an exotic mortgage called an Option ARM, an adjustable-rate loan in which the homeowner can pick his monthly payment from a variety of options.

Eventually, he'll be responsible for making full payments of $6,000 a month, he said, adding, "I don't know how we'll be able to pay that."

"It's not just the financial aspect. It's the emotional," Dunn said. "We can't eat, can't sleep. I can't concentrate on work. This is all I think about."

So the American dream of owning a home seems to have turned it into a nightmare, at least for one homeowner. How many nightmares are out there? The hard numbers are not easy to come by but if the following from LA Times is any indicator, our US and world economies are on very shaky ground:
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.
That seems like a lot of money at risk. Since L.A. median prices are $500K, California alone could be risking $290 Billion dollars. If the prices drop by half, then $145 Billion dollars of loans could be wiped out. That's just half of the risky loans in the US. And don't forget there are HELOC, fixed rate mortgage and other more traditional loans which could be at risk (esp. if and when the loan holders lose their job, get transferred, divorced, get sick, etc.).

So much for "throwing away the rent money..." ...What a nightmare we all face....

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