ARM Resets ‘The Big Question’
The New York Times has this report on adjustable rate home loans. “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.”
“With more homes on the market, prices could begin to fall. That reduces home equity and could force people whose loans change in 2008 and 2009 to consider selling, further accelerating the drop in prices.”
“Mortgage lenders, however, say they are not worried. Why? ‘It offers an opportunity,” said Brad Brunts, at Citi Mortgage, a unit of Citigroup. He, like others in the mortgage industry, sees the higher payments as a boost to the flagging mortgage refinancing business. Lenders will adjust about $500 billion in mortgages this year and $700 billion next year. Expect to find the mailbox stuffed with refinancing offers.”
“Anyone with a rate that will increase in the next few years ought to worry. If homeowners have an adjustable-rate mortgage, they can hope or pray that there is a recession severe enough for the Federal Reserve Board to lower interest rates. But they would also have to hope or pray that the recession was not so severe that they lost their jobs.”
“Hoping or praying is not a useful financial strategy, if only because most economists think that rates will climb a bit more and then stay steady through 2007. No one can say with any certainty whether rates will rise or fall in 2008 or 2009.”
“‘It all depends on the ability to refinance before the interest rate resets,’ said Suzanne Mistretta, senior director of Fitch Residential Mortgage, which analyzes credit risk of mortgages. ‘Most of them will get out. Hopefully, they will get out,’ she said. ‘That is the big question.’”
“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. 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.”
‘Most of them will get out. Hopefully, they will get out,’ she said. ‘That is the big question.’
She sounds pretty certain. Basically all we’ve heard from these people is ‘it’ll work out.’ Never mind that Fitch is making big bucks on this party. And I am sure Citigroup does see an ‘opportunity’ as these folks are forced to refi at higher rates. I wonder how many borrowers know this is how lenders look at them?
most buyers went i/o because thats all they could afford,at mtg rates of 7% or 8% most wont be able to afford the higher payments let alone even qualify.
Exactly. If they couldn’t afford 30-year fixed at 5%, how on Earth are they going to afford it at 7 or 7.5%? It has continually amazed me how people of ordinary means toss out numbers like $500,000 and $600,000 as if it’s not a lot of money to pay for an average house. You need an income of about $175-200K to legitimately afford a $600K mortgage and you have people who make a third of that buying homes in that range. This will end badly.
I would like to see a statistic on how many I/O borrowers only make the minimum payment.
I for one would get an I/O loan because it gives me more flexibility in making payments. In my case I would actually be able to pay off my mortgage overy a shorter period of time.
For example, my employer offers something called ESPP, which allows you to buy stock at a very reduced price every six months. Basically they remove a percentage of your income every pay period and at the end of the 6 month period you have a strike price. They then use the last three years worth of strike prices, take the lowest one and then use the money they removed from your income and sell you shares at a 15% discount of that lowest price. The average interest earned over the last 5 years has been 35% on a semiannual basis, if you do an immediate sell. So rather than pay the traditional mortgage, I would rather pay a 35% higher amount every 6 months. Using a spreadsheet, I calculated that this will reduce the years on my mortgage by about 16 years.
Your the type of person the IO loan was created for , not the millions of people who can’t even afford the minimum payment ,or the speculator who was caught holding the bag .
I agree, thats why we need the statistic on how many only make the minimum payment on I/Os. Right now we only have anecdotal evidence, which IMO is not enough.
…a good deal for you, but also a lot of eggs in one basket…
Yeah, my husband had those strike prices at Worldcom. We never saw a penny. Sigh . . .
I know a vp layed off when vz took over-what a fckd industry
sure the stock purchase plan is nice, no doubt about it. I’ve explained to far too many people at the office why it’s such a good deal. Your plan sounds a bit unusual, as the last two companies I worked/work for used the same formula. Lower of the price on start/end of the offering period minus 15%, so it’s money in the bank.
For your mortgage scenario, there’s only one catch. I believe that it is limited by law to no more than 10% of your salary. In the OC, ‘taint much for a $750k house or $500k condo.
Totally agree with you, John. I find the lack of common sense with the industry professionals to be nothing short of astonishing.
John in VA,
“You need an income of about $175-200K to legitimately afford a $600K mortgage..”
You’re right.
I think you can do an 600K mortgage on 130 - 150K a year. (this assumes you don’t have large medical bills, large student loans etc.)
Damn straight!
Thank you. Well said. Who is buying these homes? I mean I do pretty well for myself and managed to save quite a bit of money over the years. I could never see myself buying a $600k house, and I’m quite certain I’m in the top 5% of income earners in the country. I’m not tootin’ my own horn, I just want to know who the heck is buying these houses.
Do we have a clue to how many, if any, in the last 2 or 3 years actually refinanced to a fixed? I have seen nothing yet to indicate that any homeowners have.
most buyers went i/o because thats all they could afford,at mtg rates of 7% or 8% most wont be able to afford the higher payments let alone even qualify.
Exactly.
“It’ll work out.”
“Suzanne said so.”
“Allah will provide.”
“Allah will provide.”
Actually, to the best of my knowledge (and I admit it is very limited) Islam does not allow you to borrow money. “Neither a lender nor a borrower be” is strictly enforced. My ex-boyfriend was paying cash as he built his dream home. Tough to do in So Cal but if everyone did that we would be in a much better place.
Why would the lenders let them out of high interest loans? When you have them where you want them, why let them get out?
I suspect many people will have no way of getting out of this mess, aside from BK.
I suspect many people will have no way of getting out of this mess, aside from BK.
Which means that, as usual, you and I will end up subsidizing other people’s lousy judgement!
Intererest rates will continue to go up and they will lose their jobs. Praying is good, but it doesn’t pay for the bills.
Folks who pray should know something about usury!
Leave it to a mortgage broker to recommend that those with adjustable rate motgages lock in a fixed rate now AFTER short rates have increased 425 basis points. Current short-term interest could be peaking right now. More regulation and oversite of mortage brokers is clearly needed. The current mortgage industry is a sleazy disgrace.
I had to look at another file today for a 75+ widowed borrower who just took out an option ARM six months ago. According to my co-worker who showed me the file, she had no clue about what kind of product she had. She was nervous because her payment had increased (this is the 7.5% payment increase), wait until 5 years later when her payment doubles. This is a senior on a fixed income. I’ve said this before, when I do a reverse mortgage, a potential borrower has to be counseled before they get the loan. The same standards should apply to option arms. Borrowers need to understand the real risks, especially seniors.
“The lender may not be interested in refinancing a home loan when the value of the home is below the loan amount…The best option then is probably to sell the house and scale back.”
And how are they supposed to sell out if they can’t refi because they are upside-down? What a stupid comment.
They can sell by bringing money to the table. Wait, there is a negative savings rate in the US. Never mind.
Sounds like they need to leave the keys at the table…
lol
(Sounds like they need to leave the keys at the table…)
BMW keys and the plasma tv remote.
Option ARM mortagages are exactly what they say they are, “option”. They were sold on the “reduced payment” and people can get away paying $1500 a month on a $400,000 mortgage. Interest only is about $2100, so every year they add $7000-$8000 to the principal. I bet the majority of people have no clue that they are paying less than thec principal. 3-years down the road, they will be “confused” and “surprised”. As a previous post said, you need to make $120-130k yearly income to qualify for the $400k mortgage, not 60k.
“Sounds like they need to leave the keys at the table…”
Sounds like a plan…until the IRS comes knocking at the door, wanting their cut of the amount forgiven…or until the bank realizes that your loan was one of many of your refis, and as such, is a recourse loan, enabling them to come after your other assets…
In those cases, the approriate term is “Sucks to be you”.
Hey Ben,
You’re doing a great job on this blog. I just made a tiny donation to your blog via paypay last night… so I hope you continue tolerating me saying “Woohoo! condoes for everyone” now and then.
The “_________ for everyone!” ceased to be amusing about 800 posts ago.
What can I say, I’m easily amused.
Are you really in Greenland? I am thinking maybe that will be the next boom area. So far as I can tell, there has not been much building there yet…
Real estate is booming here! You buy a brand new house for $100K. Ya know, they’re not making any more arctic tundra!
Except that the ice/permafrost under the house is melting. Then you can call it a mobile home.
There can’t be a bubble in Greenland bc it is ice locked.
I always laugh out load when I see it. Keep ‘em coming.
Ok. True. ARM’s for everyone in that case.
““Mortgage lenders, however, say they are not worried. Why? ‘It offers an opportunity,” said Brad Brunts, at Citi Mortgage, a unit of Citigroup. He, like others in the mortgage industry, sees the higher payments as a boost to the flagging mortgage refinancing business.”
Can’t see past their own little paychecks…yet these are the people telling the masses via the media that everything is going to be fine.
Yeah, he should have just come right out and said it: “OK, we screwed a whole bunch of people by selling them loans they couldn’t afford, but now we see an ‘opportunity’ in going back to those same people and talking them into the very loan they should have gotten in the first place, when it was much cheaper.”
When it was much cheaper and still too costly - that’s why homebuyer’s went with ARM’s in the first place. DUH! Some opportunity. Paint a pretty face on a bad situation. All these jerks are just treading water trying to keep things afloat one day at a time.
I totally agree John. They were not caring about the consumer in no way, shape or form. Sad times ahead.
I’m curious. Just what products can you possibly offer? The buyer couldn’t afford a 30 yr fixed at 5 3/4%, so they took an ARM or an I/O. So now what; they are supposed to afford a 30yr fixed at 7%? Maybe a new I/O with a new teaser period? Not if you don’t have enough equity…which you wouldn’t have built up with an I/O (outside of appreciation). What investor is going to buy these mortgages? Investors are going to want to be compensated for taking on risky loans, which means that interest rates will be too high to help out anyone in trouble.
The new product is the 50yr fixed. Maybe they can afford that. If not, perhaps there could be a 60yr or 100yr, or whatever.
“If not, perhaps there could be a 60yr or 100yr, or whatever.”
Jokes on them…past a certain point, stretching the years out does little to decrease the monthly payment.
And there are already interest only loans (the same loans that many are trying to get out of). An “infinite year loan” would be equivalent to a straight interest only loan with principal due at forever.
‘ We are going to give them ANOTHER I/O (this time for 3 yrs). Pay us another 2 to 3 points and you’re off the hook for now! You can sell it for double when the price goes UP. Suzanne told me so.’
The fees for a bailout loan or re-finance could be an incentive the hungry lenders to overvalue a home, go no-doc. or over 100% if they can still sell the loan. No?
Ugh… that’s a scary thought. I have a sneaking suspicion the banks & Fed are going to pull some rabbit out of a hat to stall the process of market correction.
The last statement by a voting member of the FED was quite hawkish. It seems as though fighting inflation will continue to be their number one priority, and the effects of a deflating housing bubble a second priority. Either way, our economy gets hammered.
“With more homes on the market, prices could begin to fall.”
Correction: Prices are already falling, at least in San Diego, whose median is down by 6% since last November, and which is known as the housing bubble’s canary in the coal mine. The correct statement is, “prices could begin to fall more rapidly.”
“This canary is dead”.
“No, its not, its only sleeping”.
The first Monty Python reference on this blog!- Nice! The next one will be the Spam song as the only thing FBer’s can afford to eat!
Not even close to the first Python reference.
Within the last 2 weeks we had it is just a flesh wound and what are you going to do? Bleed on me.
You must have missed my quote about the Swamp Castle Prince and the potential bride’s “enormous tracts of land”.
Yeah and there was the ‘bring out your dead’ a while back.
I’ll claim my name as the first Python reference. Check this out.
i think someone also posted referencing the “it’s just a teensy weensy little wafer” line from Meaning of Life.
“In that case, it is better to act now before a few million other interest-only mortgage holders dump their homes on the market.”
This is generally true for anyone who anticipates needing to sell your home over the next six years. You would be wisest to move the current list price down to a level where you can sell, then plan to rent for the foreseeable future, than to wait any longer, as the inventory of used and new homes for sale grows by the day, and the larger this inventory pile becomes, the farther prices will have to fall in order to correct it.
I have family that inherited a nice Fallbrook home.
They are waiting to get to the 2 years for cap gains exemption.
I asked the question what happens if the market drops to equal or exceed the savings from not paying capital gains?
How long ago did they inherit it? Inherited property has a stepped-up basis.
10-4 they can sell anything after 2004 1/2 and not worry about a gian to speak of SELLLLLLLLLLLLLLL
The value of the home on the date of death is their basis. If they inherited it since July ‘05 it’s fallen in value. No taxes owed. If they received it earlier there’s probably very little owed, but it’s still at a LTCG rate rather than short term. In this market they are probably better off selling sooner. Prices in San Diego fell 1% YOY. That’s not actually true. Add in incentives and closes cost paid, etc and there is a much larger drop.
Just a general note: If you inherit a home, especially at a time where RE prices are high, pay to get a professional appraisal that will hold up when you plan to sell it in the future. If you sell it 15 years later when prices are back up after a big fall you want to be able to prove what it was worth when you inherited it.
I suspect the 40 or 50 year FRM will be the “escape” for these ARM victims. Think of the implications … they cannot sell, because of their debt, and they will likely pass that debt on to their children. Indentured servitude used to last but 7 years, now it might very well span a generation.
That’s clearly what the mortgage industry is hoping. But IMO they will discover that Americans don’t view defaulting on debt as such a big deal anymore. Think about it; 40 years or a 7 year workout of BK. I realize the new bankruptcy law will play a part. Still, I’ve known some folks that have declared more than once!
40 years is a long time to pray that the BK laws don’t tighten further.
There are so many variables to this equation. What percentage of potential foreclusures have ATM’d all of the equity out of their property? Those individuals would surely have reason to avoid bankruptcy, as they would be liable for all of their debt, unable to simply walk away from their residence.
Wouldn’t a wave of bankruptcies/foreclosures would be devastating to the lending industries in this country, especially in a (likely) crashing market? Surely the lenders will try to find a way to continue current payments (or perhaps a bit more,) at some expense to the borrower. I wouldn’t be surprised if that expense will be a longer term of the liability, given that the vast majority of borrowers these days seem to only care about the size of the monthly payment.
I think you are right. with the new bankruptcy laws they can come after your other assets.
As an appraiser in Central Florida I can tell you that most of the refi’s we were involved in for the past few years had more than 2 refi’s over the preceeding 1.5 years. Yep, that is right, thee refi’s in less than 2 years. Can you say “tapped out”?
“3″
If Corporate America views filing bankruptcy and screwing over thousands of individuals as no big deal, why should the average person think otherwise?
What’s good for Enron, Northwest, etc (and soon, GM) is good for the average Joe.
Hot off the press: Some lenders are now offering a 50/30 (amortized over 50 years, balloon payment after 30).
Just when you thought lending couldn’t get any more ridiculous….
Hot off the press: Some lenders are now offering a 50/30 fixed (amortized over 50 years, balloon payment after 30).
Just when you thought lending couldn’t get any more ridiculous….
Hot off the press: Some lenders are now offering a 50/30 fixed (amortized over 50 years, balloon payment after 30).
Just when you thought lending couldn’t get any more ridiculous….
…. No, I wasn’t trying to repeat myself that many times. “send” delay at its’ worst.
No, it wont be an escape. The 50-year mortgage is still and ARM. It is fixed for 5 years and adjustible for 45. It’s a horrendously bad deal.
Typo: should have read “still an ARM”.
I agree with you John . Those vultures at the mortgage companies were planning this all along . The only problem is they thought real estate would always go up and there won’t be equity to make a new loan ,(unless the secondary market goes for 130% loans ).
John in VA,
thanks for the posting.
I was pretty sure that 40 and up were fixed.
A 40/30 exists. The rate is usually 0.25%-0.375% above a regular 30-year fixed.
If you look at the difference in payments for the 40yr or 50yr over the 30yr. their not very much cheaper.
Yes, it seems like the only idiotic mortgage product that hasn’t caught on is the 40+ year loan — for the simple reason that the monthly nut is still so close to the 30.
What the bankers and mortage companies don’t like to say, or think about, is that all those FBs have another avenue out of permanant debt slavery: loading up the moving van and disappearing into the night, leaving the keys to their rapidly-depreciating, underwater house on the counter for the lender. A problem passed is a problem solved….
I think this is a real possibility. In fact, there will probably be a new gray-market growth industry in “identity creation”, sort of like what the feds do for mob informers…. Hmmm, but my computer skills probably aren’t up to it…..
Or a mass migration to South America.
Hmmm. Maybe I should investigate funding a low-income apartment development in Costa Rica for economic refugees. I doubt that extradition would be a practical way to retrieve FBs and make them pay. I doubt that a mortgage lender could attach bank accounts overseas. The FBs could work off their rent by manning a telephone support operation - I could contract their services out to Dell. At least they know the language.
Hmmmmmmmmmmm.
The IRS can.
forclose_me,
I don’t think so. They cannot reach outside national borders. Unless they can tempt the FB to return to the states, they cannot do much of anything, except to attach assets left within their jurisdiction.
{Mogambo_Rant}
BwahHaHa! Expatriot wage slaves for everyone!!!!
{/Mogambo_Rant}
Many countries have signed reprocessional extradition treaties with each other that basically mean if you have our criminals here, we’ll send them to you if you do the same for us. If you were going to invest in these apartments make sure you get a country with no tax extradition agreements with the US.
Not paying your taxes doesn’t make you a criminal until you are indicted. Gonna have a hard time proving criminal intent on the surface.
No extradition for non-criminal acts.
A sort of Al Quaida of real estate debt evaders ?
Sammy Schadenfreude,
It’s the best solution.
Let’s creators of the bubble deal with it.
As I wrote before, borrow a few billion, it’s a bank’s problem. Borrow a few trillion, it becomes OUR [taxpayer's] problem.
A payment on a 40 yr. or 50 yr. note is only nominally less than a 30 yr. The porblem refis will have beyond financing will be the appraisal. You can’t refi a house for more than it appraises for….
“…and they will likely pass that debt on to their children.”
Yes, in the form of taxes from a bailout.
what do you care if you still owe the bank a million dollar in house loan once you die. just make sure your children are set by then, meaning, graduated from college and have a good high paying jobs.
I’m already hearing commercials telling people to “stop losing sleep at night over your adjustable rate mortgage”. The brokers and mortgage industry used fear of getting priced out of ever owning a home to scare people into signing up for these crazy financing schemes. Now fear is being used to get people to refinace out of them. Hopefully the bad press about the negatives of these toxic loans will discourage new buyers from using them to pay more for a house than they can realy afford, putting more pressure on prices.
I’ve also noticed a big increase in ads and mailers aimed at ARM users. However, I’m guessing that a high percentage of the dimwits who “needed” creative financing to get into homes they really couldn’t afford, are so overextended financially that no bank will touch them when it comes to refinancing.
Don’t put money on that guess, because unfortunately you’d be guessing wrong. My email inbox of mortgage company offerings gets more and more interesting by the day.
As does mine. But most will not be saved by however creative our lenders get in the near future. Besides, what borrower will want to take on the risk when there is no reward. Meaning, people would take whatever you gave them, at whatever cost, when they felt they were going to be equity wealthy in no time. Try stuffing that loan down their throat when they know the best they can hope for is a flat market. No, I agree with earlier posts. People will finally do the math and walk.
nnvmtgbrkr-
I agree, for you, me and others here what you and what the posters above said makes perfect sense. The reward you speak of however is not financial but maintaining that sense of status. Maintaining status is far more rewarding then financial common sense these days to most people or they would not have been sucked in by the easy money.
There is going to be a whole lot of money made in the downturn by mortgage bankers, brokers, loan sharks etc. by providing money for people who are trying to maintain status.
The banks know this, they have researched it.
And they have a perfect tool to dump it off in. The secondary market.
“Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, points out that mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners’ equity of $11 trillion and a hiccup in the gross domestic product.”
The man either deliberately ignores or simply fails to see the picture. These resets will force sales on top of an already large inventory pile and drive prices down. The impact to the market price of homes and to buyer demand will devastate his industry with much collateral damage for the macroeconomy. Why is this so hard for members of the OC Real Estate Industrial Complex to grasp?
Cagan refers to ‘industry’ losses. This is separate and distinct from the losses that millions of individual homebuyers will suffer.
Individuals who sank every dime they ever owned into a over-priced McMansion will already be BK bound before the ‘industry’ loss kicks -in. The ‘industry’ losses are just the tip of this humongous iceberg.
ooops, make that BR (bankruptcy) bound
BK (Burger King) bound is also correct, assuming they have $3.49 left.
BK is the standard abbreviation for bankruptcy here.
Or BK means Ben Kaput! Ben Bernanke that is.
Hmm. Well, what’s the standard abbreviation for Burger King then?
B Rex
The problem is that he implies the industry exists in a background. So much correlated risk imploding at the same time across the mortgage industry, the real-estate-sales industry, the home construction industry, and the retail establishments whose life blood is liberated home equity will have a mutually-reinforcing feedback effect that will make the housing downturn far more damaging to the macroeconomy than Cagan seems to perceive.
scratch “background”, substitute “vacuum”
“So much correlated risk imploding at the same time”
Exactly.
Cagan is being intellectually dishonest comparing Mortgage Payment resets with the entire universe of RE.
Compare the Mortgage Payment Resets to 1 years worth of churn in that market.
Those two are the honest corrollaries because as unfashionable as it may be there are a fair number of financially conservative Americans with low to no mortgages (Robert Cote as an example).
He is putting lipstick on the pig to wrap in paid off RE with mortgage payment resets.
I have pointed this out before, all you journalists lurking here, why don’t you call these knuckleheads on it.
The real story for journalists lurking here: In a down market, what is the definition of a “solid” homeowner, and how many are there really out there. A paid off mortgage might mean nothing if personal debt is high (and if it’s just a paid off primary mortgage with HELOC debt added). The overall picture of American debt does not indicate a rosy picture for your average American homeowner.
I strongly believe that HELOCS are going to make this bust the most painful one ever.
The great “Home ATM” myth is already starting to hurt many households….those who got the impression that borrowing money against your house was sound financial strategy are discovering that DEBT IS REAL - once you sign the paperwork, that loan is yours to manage…irregardless of what happens to the property value.
I’m already seeing many distressed homeowners in the OC due primarily to the HELOC’s they have to service.
Debt is real, equity is an opinion
is a quip that I read here first, I don’t recall who posted it.
whaddya mean hoping and praying isn’t a financial strategy! publisher’s clearing house is still known as AMERICA’S RETIREMENT PLAN! and for damn good reason.as far as citigroup,didn’t anyone teach them not to tell stupid lies?i’m a loan broker in santa rosa,we are seeing short sales,actual sales prices are down 15-20% from last summers peak…..and not many lenders are willing to refi to more than a homes value in a falling market…and even if you have equity and a good fico score,if you bought too much house you likely do not qualify at a rate you can afford.
“You need a couple of good pay raises in order to afford it,” said Mark Fleming, chief economist with CoreLogic, which develops risk models for the mortgage lenders. “It’s pretty hard to deal with a payment shock of 80 percent or 90 percent,” he said
Gee, pay raises? That would be indicative of inflation. More pressure on the Fed to raise rates. What a conundrum. Wages have to go up for people to pay their mortgages, yet this puts more pressure on the Fed to raise rates. It a vicous cycle.
If the Mortgage Backed Security market starts to crumble, mortgage rates could go up even with the Fed lowering short term rates. From what I’ve read foreign investors have gone cold on buying MBS’s and dealers on holding a lot of them. When the dealers start deciding it’s time to start unloading rates will go higher .
If the MBS market starts to crumble, the entire bond market will implode, dragging banks, stocks and everything else down into a bottomless pit. House prices will/are falling like a brick, at least where I live (outside Portland, OR), and the poor fools who own MBS are going to be very, very unhappy when FNM/FRE start taking their time to provide cash-o-la to back up their implicit guarentee of MBS’s.
The “planned” devaluation (ie inflation) of the dollar will make this a little less painful, but of course, people who save money get screwed when devaluation/inflation happens. Who wants to own dollars at this point?? Not me!
foreign central banks continue to buy MBS from Fannie anhd Freddie, according to http://www.xanga.com/russwinter
Mr. Winter is mystified by these purchases, as they seem fated to go badly. However, the scuttle is what it is.
They *have* to buy. Check it out.
the feds are entirely capable of devaluing the dollar while holding inflation in check. may not be a wise solution. but do they care?
I agree, Greenspuns(now past tense)conundrum, when they kept raising and bond rates didn’t move up, will be Bernanke’s Bummer when he finally has to cut rates and they keep heading up (specifically in mortgages) due to the stress’s in the MBS market.
OCBear
Nobody believes the Treasury and other govt officials who say Fannie and Freddie have no implicit guarantee. Rather the working assumption is that they are “too big to fail.” Otherwise, the risk premium on Fannie and Freddie debt would be far larger.
There is a big difference between an explicit and implicit guarentee. At least with Treasuries, the govt can/does print enough money to pay the interest and principle, or at least roll the garbage over, again and again.
If/when FNM/FRE go bankrupt, can you imagine the mess? Think of all the retiree’s and foreigner’s, and their expectation that the f**cked borrowers will pay on the mortgages they owe. Even more to the point, the US govt cannot pay back it’s Treasury debt without either increasing taxes, or printing more money. What do you think they will do, and have been for a long time?
They will have to print.
you can bet, they will do the stupid thing.
But foreign investors are soo stupid when it comes to these things. Who were the biggest bond and debt investors in Enron ? Answer: Japaneese insurance companies. Foreigners are mostly bird brains.
ok, got a call from a mortgage broker on Friday; has a customer who bought in May 2005 for $196,000. Did an 80/20 and called my guy because they are getting killed on the second, an ARM currently at 8.5%. So I ran comps for them and sure enough, no YOY appreciation, nada, zip. My guy ended up with the inquiry because the original loan agent left the mortgage business and is now working in the finance department of a Nissan dealership. It’s starting…
Wow. At 8.75% their second would only be $386.02. If there second was originally at 4% (just guessing; no idea what rates on ARM seconds would be) then the price difference is less then $100.
They must have been skating on REALLY thin ice when they bought that house if that small of a difference is enough to “kill” them financially.
That extra $100 probably wouldn’t do them in. But add a couple of hundred for increased gas/utilitites plus another $100 for food, etc and I could see them having problems. Especially if they have a few high balance cc with the minimum payments doubling.
Sure he can’t afford the higher interest rate, but look at the bright side, he can get a bigger interest deduction (gag).
“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.”
Let me re-write this paragraph:
“Most of the time, though, homeowners will have to take more drastic steps. The lender will not be interested in refinancing a home loan when the value of the home is below the loan amount. This will happen because most homeowner’s took out all the equity in a previous refinancings.”
I prefer a straight shooter, don’t you?
This home owner gets NO relief in BK if it’s not purchase money, and, especially if it’s FRAUD, ie stated income. They can chase you to all US 50 states and posessions. When your widow puts you in a pine box, you get away, but if she signed the loan papers, they will continue after her.
Here’s the nightmare that keeps me up at night:
I’ve been very good with money all my life. Bought a house with a 30-year fixed back in the late 80s, refi’d once (but DID NOT TAKE ANY MONEY OUT, AND I SHORTENED THE LOAN) when the rates dropped, and finally paid it off. Also own 20 acres in florida (bought pre-bubble) on which we’re building a second home to actually live in (not FLIP).
We’re very frugal. Corian, not granite. Coralla, not Lexus, etc, even though we make decent $$$.
So we’ll retire with enough money to support ourselves.
Here’s the NIGHTMARE!
There will be so many millions of DOOFUSES who spent beyond their means that our Government will bail them out! With “tax credits”, debt forgiveness, “affordable housing”, and TAXING PEOPLE LIKE ME to DEATH to pay for all of it!
I’m terrified that all my saving will be for nothing. That people who overspend will be taken care of (because soccer moms with granite countertops are an important consitituency), and my income will be confiscated with taxes to pay for it.
Yeah, it could happen. Want to go in on my Costa Rican deal?
A lot of us may have to leave…
Your nightmare is my nightmare .
“I’m terrified that all my saving will be for nothing.”
Me too. Not quite terrified enough yet to invest in gold, but I’m watching things. The way I see it, deflation benefits borrowers, and hurts lenders/savers. The question is whose side the Fed/administration/powers-that-be will be on. For that, I have no answer.
sf–other way round. Inflation benefits the borrowers, cause they get to pay it back with dollars worth less. Assumes non-ARM. Imagine a 5% deflation period. Your payment remains the same, but you just took a 5% paycut and still gotta make the nut.
they probably won’t increase taxes just to bail out these flippers. the current budget deficit is many many times more than will be needed for the bailout which will most like be shared with the finance industry. taxes will be increased o reduce the deficit.
And sir that’s is why you take a small portion of your accumulated assets and purchase property in a country with a less confiscatory tax regime ideally before your regime becomes confiscatory. Sorta ironic that several Latin American countries appear to be headed in far more freedom friendly directions than the US right now.
I’ve admitted here that I’m no financial whiz, but I do have a guess at what the current (republican) majority can do to save their asses (vis-a-vis reelection) and ease the housing crunch:
immigration amnesty.
Immediately add 10-20 million folks as legal citizens, who’ll all want to buy homes in their new homeland (and do it in a fiscally responsible manner, i.e., several families going in on one purchase, no ridiculous ATM stuff), soak up a bunch of excess inventory and bail out a lot of banks almost overnight - just in time for the ‘08 elections.
Just a thought…
(and also, no partisan potshots - if the dems were in power they’d probably eyeball the same deal - if one of them was slick enough to think of it
MjM
eh, “crunch” should be crisis or crash
MjM
A few trillion in ARM resets in a country with a negative savings rate, a collapsing housing market and a slowing economy? Nah…no problem here.
Over the next few years, it seems like the lenders will still be battling with each other for the business of refinancing the I/O loans and ARMS to fixed. They will have to be competitive or they risk losing a lot of the accounts receivables from the loans they wrote the last few years to other companies now offering to refinance their current client’s loans. That has to put some lenders out of business or in a crunch. They will have to continue operating on very tight margins just to survive, so any defaults that come into the picture will have a greater affect on their business than in previous years, compared to either in “normal” or ‘bubble” times. Smaller lenders eventually going under or bought out? So fewer lenders meaning less competition and higher rates? Or harsher lending standards? Vicious cycle to be sure.
On the other hand, they know they have the re-financers by the throat, and could work in lock-step to charge higher refinance fees or rates to make up for the fact that they are going to make less revenue per dollar borrowed month to month and year to year. Another way of looking at this is, when all of these lenders wrote these I/O loans and ARMS over the past few years, did they take into consideration that potentially they would have to fight to keep them in such a few short years? And of course there are the inevitable foreclosures. Sure, many of the current loans will be replaced by new loans to help those lenders, but isn’t it hard to imagine that their math truly took that into account, if it does play out that way?
Long story short (too late): If either scenario plays out, it’s just going to add to this whole mess. Either the specuvestors are royally screwed (already are), or the banks are, or both. More foreclosures, more inventory, lower prices. Say it, greenlander!
Well said!
what i find comical (nothing new when reading something in the NY Slimes) is the Times saying you have all these options if you run into trouble on the ARM reset. get into a fixed or just sell, no biggie. hey dumbos, who’s to say you can sell when property values are going down?
And who is to say you can get into a fixed when interest rates are rising and you could not afford a fixed at last year’s lower rate?
Whether you could refinance at all when the MBS market goes toes up. If the originators of these loans actually have to hold them, alot of these FBs will suddenly discover what actual underwriting is: pay stubs, bank statements, tax returns, and high FICO scores required.
I am actually surprised at the tone of thi article. Is it me or is decidedly negative, with little to comfort the bagholders?
Simmssays…10 Inventalicious New Products
http://www.americaninventorspot.com/top_10_inventalicious_products
Last I checked there were some pretty steep pre payment penalties for ARM’s. Something to the tune of 3-5% of the loan amount.
If you cannot afford the house in the first place, and you are paying I/O (which means you have zero equity), how are you going to refinance?
That’s right…I forgot about the pre-payment penalties. Could be thousands, as I recall.
The only person an I/O really makes sense for is someone who has the $$$ in the bank to cover the mortgage should the rates start rising. And they add the “penalties” to make sure that they make some profit off of these folks.
Not all ARMs have prepayment penalties. Mostly, you’ll find that with ARMs that offer a really nice, long teaser rate. (That said, are prepayment penalties legal in every state? I admit my ignorance on that.)
Many or most of the “market rate” ARMS do not have prepayment penalties, though, and these are the ones that sensible people have got. And yes, these are best made for people who can cover that mortgage if (no — when!) the rates rise.
If you’re not able to cover a projected higher adjustment on the ARM, then the ARM is not for you. And if you need a low teaser rate (and thus get encumbered with pre-payment penalty clauses) just to qualify for the ARM, then that ARM is definitely not for you.
But people are only figuring that out a year into it. Ouch.
“In a declining or low interest rate environment as we have had for many years an adjustable rate mortgage makes perfect sense, better sense than a fixed really.”
Alan Greenspan
March 2004
Notice the past tense even when he said that.
It wasn’t a forward looking statement, but Joe Sixpack sure took it as one.
Great point! People don’t seem to discriminate much about careful wording (semantics) lately, and they are suffering for it now. Had they rode an adjustable down to the bottom, and re-financed fixed (again at the bottom), they would have paid fees but still be in great shape.
Whose responsibility was it to tell them when the bottom occured, and how would they have known?
Not a Greenspan apologist, just a realist or pragmatist.
He was also talking about the relativly expensive option that is imbedded in a fixed rate mortgage (refinanceability). For most of the last 20 years homeowners paid little heed to what that option cost them and made many a bond manager (and their investors) very, very wealthy by providing it.
But that is a very, very technical point and was probably way over the heads of 98% of his audience (he was speaking to Congress, I believe).
where do you see the past tense? past tense wording would be “as we …HAD for many years” and “MADE perfect sense”
Alan Grenspan has been offered a new job. Clown in Las Vegas for the next circus show at “Cirque du Soleil”.
Okay, I’m going to give Easy Al the benefit of the doubt:
In a declining interest rate environment it makes perfect sense, sure. If rates are 18% down from 24% and you are expecting them to go down to 6% or lower, then by all means, get an ARM. But in a “low interest rate environment,” why not lock in the low rates with a fixed before they start going up?
Unless he means enjoy the low rates now and switch to a fixed when they start to rise. If you can… and don’t mind paying pre-payment penalties.
People will do anything to stay in their homes, including max out their credit cards, hock all their wares, take an additional job, etc. I think that after the major resets in 2008, we’ll still have 1-2 years of people trying to coast before real adjustments begin. Unlike others, I expect flat to slight decline over the next 2 years, followed by prolonged and indisputible thud in 2010. For young families like mine, the holdout will require lots and lots of patience.
“Trying to coast” is seriously the wrong phrase here. How about “scrambling to stay afloat”?
I think we are starting to see that already in flow of funds report- decreasing equity extraction (because house prices are flat the ATM has dried up), and increasing credit debt (turning to plastic to pay the mortgage??)
Whoops, I mean thud in 2009.
This mess was designed by the lenders who knew what was going to happen! No down, no in depth back ground checks;pushed adjustables from the start. Remember 2 years ago, Greenspan saying “adjustables are a great way to buy a home” ? As Warren Buffet says, sharecroppers[debt]croppers for life. Perhaps the lender will offer 50,maybe 75,100 year loans to work “it out” to keep the monthly payment coming in. They of course will have new fees, interest charges etc for their troubles. Remember under the new bankruptcy laws, they can get judgements on those who do not go along with their plans. Homeowners both gullible and greedy also brought this mess upon themselves;only the lenders were there waiting for the fish to be hooked.Once the hook is set, it is retrieved. Mortgage broker retired 15 yrs. ago
“The New York Times has this report on adjustable rate home loans. “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.”
So, the left wing extremists (Democrats) on the right and left coasts have finally realized that their mania-induced house prices will collapse no matter what is done about it.
Solution: Blame the Republicans, of course.
Think it’s an election year issue brewing ? I’d love to see the finger pointing on this one with both parties beholden to the credit industry.
Most political pundints say that the war will be the top issue of the 2008 election. Not one (that I know of) says the housing crash will even be an issue. I wonder if there are any national politicians that are planning for that eventuality?
The American Media has been largely restrained from reporting the casulties of war in the style that was used during Vietnam. I suspect the coverage on FB’s will be quite sensational in contrast. Will the average american without sons, daughters, husbands and wives in Iraq care more about the war or more about losing their home ? Will the next Presidential Candidate be forced to deal with the loanshark attitude of the credit industry ? As an aside, I find it hilirious that the loan industry thinks it will be able to rob it ’s victims a second time when they did such a thorough job of cleaning them out the 1st time. The well is dry boys, time to start interviewing for that Wal-Mart managers position.
With neither party doing anything real to correct the problem.
“I’d love to see the finger pointing on this one with both parties beholden to the credit industry.”
If that’s true, if the credit industry runs the political show (along with energy interests of course)… then I don’t see how they could possibly benefit from inflation, and so a deflationary scenario would be the more likely in the case of a recession.
It’s hard to be the party in power when the economy comes crashing down. It won’t be an issue in 2006, but in 2008, Middle East and North Korea (et. al) will be playing fiddle to the economy.
Last I checked right wing extremists (republicans) were in control of every branch of government….hmmm who should we blame. Hey how come you havent signed up to fight in the global war on terror yet?
exactly. the GOP is no more to blame than the Democrats, the Greens, the Whigs, and the Tories…
I’m not sure what you’re trying to say. Are you blaming coastal Democrats for the bubble and saying they will turn around and point to Republicans?
Or are you making a tongue in cheek remark that this, like everything else that happens today, will be politicized?
No need to blame the Democrats when morons like you post. Seriously, you “price doubt” have got to be the stupidest person on this blog.
The biggest problem will be people who bought with 100% financing on 2 and 3 year interest only loans, where, if prices drop, they will not be able to refinance. Many of them cannot afford the payments even now.
(BTW, the bank I work for, will alow you to refinance inthe future, without a new appraisal, IF…. the original LTV and TLTV was 80% or under, and your current credit report is good, and you have not had late payments on the home loan.)
Heard on the radio today in Los Angeles: a mortgage broker with a show, showing how someone can do a cashout refinance of their existing house, maximizing leverage, and buy another house, using Option ARMs (monthly rate adjustment with below interest-only payments) on both houses, with “exremely low payments.” (My bank does not do Option ARMS.) The insanity continues……..
you can do this anytime as long as you have equity. the problem is in a stagnant of deflating RE prices.
yeah, but what are the chances they’d continue this practice when YoYs hit -5%?
I don’t see 40 or 50yr mortgages mailing anyone out…
500k @7% for 30yrs = $3325
500k @ 7.25% for 40 yrs= $3200
500k @7.5% for 50 yrs= $3200
meant “bailing”
Where’s SoCalMtgGuy when you need him?
What was it a famous Poker player once said (Johhny Moss I think?) “You can sheer a sheep many times but you can only skin it once”.
Sounds like the Mortgage Industry may have skinned a few sheep this time around.
Here is a piece that puts the Times article in perspective. It’s worse than they say it is.
http://beatthepress.blogspot.com/2006/07/reassurances-on-housing-bubble.html