Sunday, July 16, 2006

Adjustable Rate Mortgages - " all the makings of a classic horror story"

This one comes to us from Damon Darlin at the New York Times. Many of you may recognize the name, Damon is a regular contributor toThe Walkthru, the NY Times real estate blog.

Keep Eyes Fixed on Your Variable-Rate Mortgage

The raising of interest rates on millions of adjustable rate mortgages over the next several years has all the makings of a classic horror story.

As home prices appreciated from ridiculously high to unbelievably higher, more Americans began using mortgages that allowed them to buy more house for less of a monthly payment. Next year, a large portion of those rates move up and homeowners who opted for the exotic mortgages could find their payments doubled. Talk about bloody. They need to find a way to minimize the pain.

Many will refinance their loans. But for others, whose mortgages now exceed the value of their homes or whose debt payments exceed 40 percent of their incomes, there may be no other solution than to get out of their houses. With the housing market cooling, selling it may not be easy. Some may default on their loans.

With more homes on the market, prices could begin to fall. That reduces home equity — the difference between the amount borrowed and the total value of the home — and could force people whose loans change in 2008 and 2009 to consider selling, further accelerating the drop in prices. Some of those cities with the highest proportions of interest-only loans are also at the greatest risk of falling prices.
On a personal level, however, there is going to be pain as homeowners struggle to make higher payments. In 2003, of all new mortgages, 10.2 percent were interest-only, meaning the homeowner paid only the interest for the initial period of the loan. According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month.
Traditionally, interest-only loans and adjustable-rate loans were used by people who expected to live in a house only a short time, but such loans have turned into “affordability products” as housing prices rose. The interest rate on the loans, while below that of conventional 30-year fixed-rate mortgages at the beginning, resets after 3, 5, 7 or 10 years, depending on the loan. So, homeowners who took out loans in 2004 could find, for example, that their initial 4.25 percent loan climbs to 6.25 percent or 7.25 percent next year.
Sometimes, though, homeowners may have to take more drastic steps. The lender may not be interested in refinancing a home loan when the value of the home is below the loan amount. That could happen because a homeowner took out all the equity in a previous refinancing. (Freddie Mac estimates that Americans took $556 billion out of their homes through cash-out refinancings and home equity loans since 2004.)

It could happen if the price of the house has fallen or if the owner has been making only the minimum payment on a payment-option loan so that the loan balance has actually grown. (It is what the industry calls a negative-amortization loan). The best option then is probably to sell the house and scale back. Homeowners may also want to sell if they can clearly see that there is no way they can make the higher, refinanced payment.

In that case, it is better to act now before a few million other interest-only mortgage holders dump their homes on the market.


Blogger grim said...

A must see over at BubbleMeter..

Is There a Realtor Bubble?

7/16/2006 08:30:00 PM  
Blogger grim said...

From an economic standpoint, this week is going to be significant.

Empire State Index
Capacity Utilization
Industrial Production

Net Foreign Purchases

Building Permits
Housing Starts

FOMC Mintes
Leading Indicators
Philly Fed

7/16/2006 08:36:00 PM  
Anonymous Anonymous said...

Realtor Bubble = Perfume Squirter alert.

Really, we will always have career drifters and skimmers. Using any professional with certifications or credentials does not absolve a consumer of responsibility. Therefore, I truly believe that the buyer must not try to shift blame, no matter what role the agent had.

Once again, [I think I sound like a broken record] most people spend more time at the Verizon booth studying their new cell phone contract than they do interviewing an agent to determine qualification.


7/16/2006 09:06:00 PM  
Anonymous Anonymous said...

We have friends that purchased a home in 2004, their taxes doubled in 2005. They had to bail on their home and sold at a loss. At least they were able to get out while they had time before the market crashes.
The market is falling, and this is a perfect example of what is to come. Even though they took a small loss after closing, there will be other sellers that may have a lot more trouble getting out and selling in a market that is clearly in danger. This is getting interesting.


7/16/2006 10:20:00 PM  
Anonymous Anonymous said...

A house is not a piggy bank
Forget home equity as retirement solution -- except when it's the only solution

By Amy Hoak, MarketWatch
Last Update: 4:34 PM ET Jul 16, 2006

CHICAGO (MarketWatch) -- The equity you build up in your home is not a retirement-savings account, although many Americans are tempted to think that it is...


7/16/2006 11:20:00 PM  
Anonymous Anonymous said...

These mortgage stats blew me away:

Data Collected by the
"Mortgage Brokers Association for Responsible Lending"

1. 37.2% of non-agency mortgage backed securities were no document loans in 2005.
2. 49.3% of ARMS with interest only features originated in 2004 lacked full documentation.
3. As of September 2005, Adjustable rate Mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the subprime sector.
4. In 2006 97.5% of borrowers are likely to face a payment shock of at least 25% and 75% of borrowers could face a shock of 50% or more.iv These changes neglect additional shocks that would result from the repayment of principal because of current interest only payments!
5. Payments will increase on 41% of the outstanding subprime loans in 2006 alone.
6. As of March 22, 2006 53.1% of interest only ARMS had a prepayment penalty.
7. 70% of borrowers with Option ARMs (Arms that allow negative amortization) are currently making minimum payments.
8. In 2004 $600 BILLION of consumers' spending power was from borrowing against home values. That is double the value of President Bush's tax cuts, as estimated by Brooking Institution scholar Peter Orzag.
9. 2nd homes accounted for 14% of new mortgages in 2004; in 2000 it was only 7%. Mr. Greenspan said that the fact that someone can sell a 2nd home without moving, "suggests that speculative activity may have had a greater role in generating the recent increases than it customarily has had in the past."
10. Residential housing now makes up 16 percent, or $1.9 trillion, of the gross domestic product and is the economy's largest single sector, slightly bigger than the industries and services that supply health care.
11. In 2005 the FBI convicted only 170 people nationally for mortgage fraud. In 2004 that number was 172 people. According to the FBI the hot spots for Mortgage Fraud activity in 2004 (per capita) were: California, Nevada, Utah, Arizona, Colorado, Missouri, Illinois, Maryland, Georgia, and Florida.
12. In the San Francisco Bay Area alone, almost 75% of mortgage loans taken out last year (2005) allowed borrowers to delay the payment of principle. Negatively amortized loans jumped to 29% of the Bay Area mortgage market from less than 10% in 2004.
13. The following chart shows the percentage of Bay Area loans that were interest only or Option ARMs (know as negative amortization).

Year Interest Only Option Arm
2005 42.6% 29.1%
2004 43.7% 9.6%
2003 20.3% 0.8%
2002 12.0% 1.7%
2001 2.9% 1.6%

Thanks to Marin RE Bubble Blog for the link:


7/16/2006 11:55:00 PM  
Anonymous Anonymous said...

what is "non-agency mortgage "?

7/17/2006 04:52:00 AM  
Anonymous Anonymous said...

Yeah Grim,

This week is going to be interesting with all the econ data released and how its going to be viewed with all that is going on geopolitically....and just think....there still has not been a hurricane yet...

Man, these next few months are going to be rough.


7/17/2006 05:06:00 AM  
Blogger Metroplexual said...

Damon as many of you may recall was a troll here. Not that trolls are so bad, but he would argue that everything is fine. Nice to see he has come around.

Hey Damon is it a bubble yet?

BTW my word verification is ssurf. I guess I gotta go to the beach this week!

7/17/2006 06:13:00 AM  
Anonymous Anonymous said...

The housing market is CRASHING. Just the Greedy Money grubbing sellers have not taken notice yet....but they will be forced to.


BOOOOOOOOOOYcott Ripoff House Prices



7/17/2006 06:16:00 AM  
Blogger skep-tic said...

nice to see the Times is finally starting to report the other side of the story. up until very recently, they have been unabashed cheerleaders for all of their developer and mortgage co. ad-clients. maybe with their readership plummeting, they're finding that they need to get reacquainted with the facts

7/17/2006 08:30:00 AM  
Anonymous Anonymous said...

It's over for NJ.

The facts speak for themselves.

Housing taking a dump,,,,

However,Trenton has everything
under control..

The tax raise will solve this
short term problem

7/17/2006 09:56:00 AM  
Anonymous Anonymous said...

Had the bigeest housing bull FINALLY admit things are slow.

He was the same slug that was tooting his horn when Sun Micro was $96 a shares.

For this guy to admit anything means it's really bad.

HOUSING BUST!!!!!!!!!!!

Many will survive unscathed some will be ruined. Free markets at work.



7/17/2006 12:15:00 PM  

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