Betting the House

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By RANDALL W. FORSYTH http://online.barrons.com/article/SB122882017811791223.html?mod=b_hps_9_0001_b_online_exclusives_weekday_r1

WHO ARE THE HOMEOWNERS most likely to get in trouble with funky mortgages, such as alt-A, option ARMs and interest-only loans?

The popular perception is these were folks who borrowed neither wisely or well, extracting cash from their houses to go on spending sprees, to redecorate the house or buy a boat or pay off credit card balances run up on big-screen TVs or vacations. Or they tapped the money from their house to buy a vacation condo, or two or three to flip.

Not subprime mortgages, mind you, which were mainly pushed on the least-affluent and most vulnerable borrowers. No, these are mortgages that were given to reasonably substantial borrowers who wanted loans with few questions asked, especially pesky ones about income.

Owners of small businesses, for instance.

A surprisingly large proportion of self-employed entrepreneurs used risky mortgages either to start or to expand their businesses, according to a recent study by the National Association for the Self-Employed. And millions of them face sharp increase in their loan payments -- just as the economy tumbles into a freefall.

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1. The "no doc" feature was attractive

According to NASE, an estimated 3.7 million small business owners have what the group calls "toxic mortgages: -- alt-A loans, alt-A adjustable-rate mortgages, option ARMs and interest-only loans. Alt-A refers to loans that were offered to prime or near-prime borrowers but typically were of the notorious "no-doc" variety -- meaning there was no documentation of income or assets. Option ARMs allow the borrower to make a smaller monthly payment, but which gets added onto the principal, up until a point.

The appeal of these mortgages is obvious, especially to somebody who runs a cash-based business. Let's just say some income falls through the cracks. Bankers and other lenders who make business loans can be sticklers for documentation such as tax returns.

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2. Sounds like my former boss

who owns a small business and only paid interest on his many, many, many loans he had out. His house had three mortgages on it, I think, and the business had several. Since the slowdown in the real estate business, which directly impacted his termite/pest control company, he was borrowing more. When I drive by my old office, I wonder how much longer he'll even be in business as the bank calls in all his loans. I feel sorry for the other folks who work for him.