Borrowers, Lenders Prepare For Payments To ‘Vault’
The Wall Street Journal reports on a Fed borrowing study. “A new study by Federal Reserve Board economists found that about 35% of people with adjustable-rate mortgages didn’t know how much the rate could increase at one time, and 41% weren’t sure of the maximum rate they could face. About 28% didn’t know which index of interest rates would be used to determine their adjustments; many others gave incorrect answers, such as the consumer price index or ‘the going rate.’”
“What they’re told [by loan officers and brokers] is, ‘Don’t worry about it because you can refinance before the adjustment hits,’ Stella Adams says. ‘Consumers think that if the broker says I can afford this, [then] I can afford this.’ Another problem is that borrowers often choose their loans largely based on the initial monthly payments rather than carefully studying which loan would be in their best long-term interests.”
From the Mercury News. “Lenders are growing wary of the riskier yet more flexible mortgages favored in Silicon Valley, even as rising interest rates are making it tougher for buyers to afford the region’s high-priced homes. Behind the scenes, lenders, regulators and investors are making changes that could make it harder for borrowers to stretch into homes or refinance existing mortgages.”
“Industry experts are beginning to see additional changes that could affect borrowers who want to buy homes or refinance. Some lenders are less willing to let customers take out loans bigger than their incomes typically would justify. Some are shaving their predictions of how quickly rising home prices will provide equity that can cushion homeowners and lenders alike. There’s more wariness of stated-income loans, also known as ‘liars’ loans’.
“Also falling out of favor are so-called piggyback loans that add a second loan for buyers who need to borrow the down payment, said Anthony Hsieh. Some lenders now require borrowers to pay off or refinance the balance of the second loan within two years.”
“Meanwhile, Wall Street agencies that grade the risk of mortgages sold to investors have made it more expensive for lenders to sell bundles of exotic loans to investors. Some smaller sub-prime lenders, who cater to borrowers with sketchier finances, are charging higher interest rates to compensate, said Grant Bailey, a director for Fitch Ratings.”
“Radio ads increasingly are playing off the fear of rising rates rather than the temptation of low monthly payments with an interest-only loan, said Robert Kleinhenz, deputy chief economist for CAR. Wells Fargo says it’s getting a stream of calls from skittish homeowners holding these unconventional mortgages who want to refinance before their monthly payments vault.”
“And then there are home buyers who feel buffeted by rising interest rates and the risks of exotic loans. Twenty-four-year-old Catherine Gutierrez is two weeks from closing a deal for a new $305,000 condominium. It boasts granite countertops, stainless steel fixtures and cherry-stained cabinets. ‘It looks sleek, it looks clean, and it’s so what I am,’ Gutierrez said.”
“But Gutierrez was uncomfortable when one mortgage broker first steered her toward piggyback loans, then recommended a payment-option plan that would cause her loan to grow whenever she elected to pay only a portion of the monthly interest. ‘He was saying the property will appreciate more than what would be added on top’ of the original principal, Gutierrez said. ‘I just didn’t want to take that risk and put that much faith in the market.’”
“Instead, Gutierrez plans to get financial help from a parent and take out an 80 percent interest-only loan that would guarantee her five years of payments at a fixed rate. Is she confident she can still make the payments or refinance when the payments jump in five years? ‘I think so,’ Gutierrez said. ‘After that I would see what rates are doing. You can’t predict the future. You either jump or you don’t. I’m jumping.’”
“You either jump or you don’t. I’m jumping”
Pretty sure this is what Coyote’s last thoughts were when trying to follow Roadrunner off a cliff….
You’re either f@cked or you’re not. I’m f@cked.
Priceless.
BayQT~
Gutierrez said. “You either jump or you don’t. I’m jumping.’”
WITHOUT A PARACHUTE…
yep, she’s f@cked!
This is too funny, nice analogy
Yep. The only difference is that cartoon characters don’t get hurt.
HOLY TRAINWRECKS!
AFB?
The time to jump into an ARM is when interest rates are unusually high, not when they are unusually low. I can hardly believe her parents are helping her to commit financial suicide.
To be fair, by fixing for 5 years Ms Gutierrez is far from the worst case we’re going to see.
“To be fair, by fixing for 5 years Ms Gutierrez is far from the worst case we’re going to see.”
Why? What if her condo starts downhill in value as soon as she buys it and it is worth only 50% of what she is paying now for it in 5 years and her parent’s house is worth 50% of what they think it is now and they can’t extract any more money from it and in 5 years the interest rates are 12%? Maybe people with two year resets will only lose 20% instead of 50%. I am not predicting that that will happen, I am just saying that simply because it resets in 5 years does not mean that it is better than one that resets sooner, because we are at a place where there is reason to believe that the situation could very well become nasty and stay bad for over 5 years.
remember though….the coyote always is in mid air before he realizes that he is going DOWN. This is what will happen to many of the sellers I suspect.
Reminds me of college campus credit card solicitors. They get them locked in to a lifetime of debt when they are young and stupid. Sign them up before they know what it means to pay off a $10,000 credit card debt while only making $30,000 a year–with or without a college degree.
they get conditioned to think that high CC debt is normal.
I’ve heard of kids racking up HUGE CC bills by charging pizza, beer and soda…and whatever. Too young and too poor to be disciplined enough to have a CC.
BayQT~
No one should be allowed to have a credit card until they are 30 years old….
Credit cards are great tools that give 1% back on purchases, allow you to easily keep electronic records of all purchases and import them to quicken or MS Money, build a long credit history necessary for a good FICO score, and protect the consumer from unscrupulous merchants by allowing you to dispute charges and refund your money. I think most people should get a credit card at 18. The problem isn’t the credit card it is the lack of basic financial education. We need to educate all citizens in personal finance and economics throughout k-12 schooling. Then once people know better and they still go out and rack up the debt I won’t feel bad letting them live like a wage slave paycheck to paycheck until they die.
Actually, my daughter got her credit card when she was 19, and I thought she should get it because I know she is financially responsible. She started working when she was 16 and has always been a good saver. I was only half serious when I said no one should be allowed to get a credit card until they were 30. Actually, some people should get a credit card when they are 18 and others would be better off if they were never be allowed to get one, except there is no way for the credit card companies to know which people are which.
Typical boomerthink — you’re not old enough to have a credit card or order a beer, but you’re old enough to live on your own, operate a 3,000 lb motor vehicle, sign binding legal contracts, and join the armed services.
No one should be allowed to have a credit card with a limit about $300 until they are 22. Or prepaid. Then raise that as their income grows.
My 9-month old daughter has a CC… she’s on ours…
BayQT-
But, buuuut, buuuuuutttt THIS IS DIFFERENT!
This is an “Investment”… and it’s “So her”
There was a blurb on the news here last week about how the spring break college kids in masses were signing up for credit cards down on the beach using fake names, addresses and SSNs because they wanted the schwag (t-shirts, beer mugs, whatever) and didn’t want to have any of the credit cards because they knew credit cards could get you into trouble.
Made me feel slightly better about the youth of America.
That’s how I got my Padres t-shirt!
The New York Times
June 16, 2005
The Trillion-Dollar Bet
By DAVID LEONHARDT and MOTOKO RICH
American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad.
The problem is that new types of mortgages that hold down monthly payments for families - helping many buy homes that they would not otherwise be able to afford - also require potentially far higher payments in future years.
The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages.
This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.
But in 2007, the portion will soar, with $1 trillion of the nation’s mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.
The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.
The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth. For individual families, the problems could be significant.
You know half these FB’s are thinking, “big deal, the interest rate goes up from 1.9% to 7%, that’s like 5%, ok so my payment goes up by 5% too, I can handle that…”
“Poised at the edge of cliff, is Gutierrez confident she can survive the fall to the rocky ground below? ‘I think so,’ Gutierrez said. ‘You can’t predict the future. You either jump or you don’t. I’m jumping.”
Doh, should be “edge of a cliff” …well, you get the idea.
“You either jump or you don’t. I’m jumping.” I think we’ve found a new catchphrase to sum up speculative thought, or lack thereof. As Orwell argues in his essay Politics and the English Language, people who unthinkingly and uncritically parrot such ready-made phrases are effectively turning their brains off and letting others do their thinking for them. People’s critical faculties have been effectively colonized by the feel-good but meaningless slogans of ‘positive thinking’ pop psychology and marketing campaigns. Just do it.
Another Orwell statement:
What can you do against the lunatic who is more intelligent than yourself, who gives your arguments a fair hearing and then simply persists in his lunacy?
Um, a buyer in the current RE market?
You can predict the future with a 30 year fixed rate mortgage.
lmao
These jumpers are not coyotes….
but Lemmings…”so sleak, so clean, so cherry”….just before they mass migrate to the bankruptcy courts.
‘He was saying the property will appreciate more than what would be added on top’ of the original principal, Gutierrez said. ‘I just didn’t want to take that risk and put that much faith in the market.’”
Someone should write her and point her to this and SoCalMgtGuy’s blog. I’m stuck in meetings this afternoon, but I will try to do so when I get back if someone else hasn’t already.
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=S418394&page=3&property_type=SFR&mls=mls_so_cal&cKey=0×416930&source=SOCALMLS
Hey bubble buddies can anyone tell me home much they bought this home for. I guess my real question is can this guy stand anymore pain dropping his price,,He dropped a month ago and still no bites! And look at the HOA on top of your Mortage?????
Property Sale Information
Sale Date 10/20/2003 $/Sq. Ft. $234.10
Sale Price $405,000.00
1st Loan $364,500.00
Prior Sale Amt. $255,500.00
Thank You!!!!!
I hope your there when I’m ready to buy! No I dont plan on buying any time soon wanna save more, Plus I’m sitting In my foxhole with the rest of you!!!
But if your a realitor and feel like many of the people on here, then there could be a future for us!!!
Mike OC– 5% drop — taint nothin …remember he’s spending more than that on commish. When you start seeing 5% more off every 3 wks or so… then you know the fun’s begun.
“…Twenty-four-year-old Catherine Gutierrez is two weeks from closing a deal for a new $305,000 condominium. It boasts granite countertops, stainless steel fixtures and cherry-stained cabinets. ‘It looks sleek, it looks clean, and it’s so what I am,’ Gutierrez said.”
“it’s so what I am, a brainless twit with no money and no hope of making these payments on time.”
Someone should tell her that those features which probably cost an additional 20k (for argument’s sake), were probably used as justification for a 75k increase in the price because people like her in seemingly thousands of transactions don’t stop to think about the real value.
But she grew up watching MTV “Cribs”… and it’s just the cool thing to do!
I think it was rude of her to even think of dragging her poor parents into her mess by borrowing money from them which she would never be able to pay back.
Here’s a little hint for Ms. Gutierrez: you may not be able to tell the future for certain, but you can certainly make educated choices by researching the past. And the past says that current interest rates are still incredibly low even after the total insanity the last few years.
If she can’t make the payments on an interest only loan at these rates, what makes her think she can make them when they reset at likely a higher rate when principle is added on?
When did a 300k liability become Monopoly money with these people?
The REALLY sad thing is that Ms. Gutierrez is one of the more resposnible ones. She TURNED DOWN an option-ARM loan and chose a 5 year “fixed” interest-only loan with a HIGHER payment because she didn’t believe her broker’s song and dance.
Think about that. In this freakish world, a “prudent” buyer is one who declines an option-ARM for an interest only!
This is so messed up.
It’s like someone turning down a Ford Pinto in favor of a Suzuki Sidekick. You’ll have a moderately better chance of living through a rollover than fiery, rearender-induced, explosion.
Prefect analogy. Nice.
ford pintoes rocked my friend had one with 200k on it and the carb was held on with a wood screw.
The actual terms of some of these loans are very complicated. I have no doubt that the percentage of borrowers who actually understand how their adjustable loans work (and neg am, IO, etc, even more so). You need to understand: the start rate, the reset date, the margin, the index, the lifetime cap, the yearly cap, the interest accruing vs. the interest you must pay (a la neg am), possible balloon payments, the term of amortization, etc., etc. I bet the vast majority of adjustable borrowers can’t even tell you what their loan is indexed to.
I couldn’t agree more, but from what I read it seems there are some gross misconceptions which are quite common. (And which haven’t been adequately explained or have been straight out skated over/misrepresented by the broker :(.)
Things like thinking a 1% rise in interest rates will mean a 1% rise in payments.
the sad, or maybe good thing based on how you look at it, is she is only 24. plenty of time to touch your hand to the stove, get burned and learn your lesson before retirement.
What retirement???? she will burn herself permanently, look at what the future holds..outsourced jobs, cheap labor, downsized companies. Wake up people.
So much for the theory that everyone in the bay area is actually making enough money to warrant these prices. People delude themselves to believing in the google effect, options, bonuses (pick your favorite reason that the bay area is different). If this was really true why do 50% of people need to take IO loans.
She’s 24 and contemplating buying a $305K condo?!? I’m only ten years her senior and I could not even imagine financing that when I was her age.
I’m almost double her age with an 18 year career as an EE and I still won’t pay that much for a house (let alone a condo). I actually have nearly as much in savings as my house is worth, and I’m still not quite on track for retirement.
At her age I was renting and piling money into the bank.
She’s a Latina. Owning a home is a HUGE badge for Latinos to wear. Latinos are very family oriented and a home for your family is a big accomplishment. You are programmed you must be married by a certain age, you must have kids if you do, you must own a home, etc..
Even so, it will be her financial undoing in the near future.
…you must be rock-stupid and in debt, sucking off welfare eventually…
I get the feeling that a lot of people who have never had any real savings don’t have much of a conceptual distinction between large amounts of money (eg, between $200,000 and $300,000 and $400,000).
Probably true. I had started saving a downpayment when I was her age and just started out in public accounting. It took me a year to save $15K while living at home before I had a reasonable downpayment. That was a result of investing in the late 90’s stock market too! Now, I save even more and invest even more because that’s the only way to reach increments that you’re talking about (100, 200, 300K). Otherwise, it’s almost impossible.
I also think that’s why they don’t seem to make the connection between fundamentals and the whacked out prices for housing. The don’t seem to intuitively sense that there is something wrong with the prices.
C. Northcote Parkinson (an English writer; is the phrase “Parkinson’s Law” common parlance in the US? :)) made this connection back in the 1950’s with respect to company board discussions.
Been a buzzword in US business (& other organizations) since at least the 60s.
Part of the problem is also due to the fact that they perceive no actual risk, despite talk of ‘leaping’ or referring to themselves as ‘risk takers’.
They’ve all been blinded by the ‘Greenspan put’ and believe themselves similarly invulnerable. Large debt amounts are therefore not cause for concern, as they are considered only as ‘investments’ which invariably lead to larger returns.
Such braindead speculators also explain why prices haven’t dropped in many reduced-volume markets: the stupid money is still buying. The music has stopped, but they’re still dancing.
I wouldn’t even want to finance $305k at my age. These house prices are scary!
People are funny! My neighbors will drive 100 miles out of their way to save $ 50 bucks on a new TV but will (and did) buy a condo in Las Vegas as a second home (investment property) down payment financed from a HELOC.
Sometimes I think I’m living in a Twilight Zone episode.
DC: The old saying goes, “Penny-wise, but Pound foolish”.
Don’t worry about them! They’ll just BK leaving you and me to foot their bill (in higher prices, etc.)
“Instead, Gutierrez plans to get financial help from a parent who added another $60k to his/her HELOC on top of the $50k taken out for a recent purchase of a tricked out Denali.
Is she confident she can still make the payments or refinance when the payments jump in five years? ‘I think so, but I can always tap out my parent’s home-equity if needed’ Gutierrez said.
‘After that I would see what rates are doing. You can’t predict the future. You either jump or you don’t. I’m jumping off a cliff.’”
Wow…that’s sad. Her parents! Putting her parents in financial dire straits! Sweet Holy Moses…I’d kill my kids for even thinking like that!
I’ve always liked girls with granite countertops!
i do girls on gct
It seems like everyone is doing a girl on a granite counter top
Im assuming that these 5 year fixed rates convert to a adjustable or to whatever the higher fixed rate would be in five years from now . Isnt Gutierrez concerned about the fact that in 5 years it might be a tight money market , interest rates sky high ,and she might not have to option to refinance to something more favorable.
If these mortgage brokers and realtors are selling loans based on the premise that you can refinance down the road out of them than they haven’t advised the client of situations in which they can’t get out of the loans . I have seen lenders raise rates to 18% , so ,is she going to get out of the loan in a 18% market . Be willing to live with the loan forever if you buy it today is my motto
Here in Seattle, the ads on the radio are still loudly bashing consumers over the head with how terrific low monthly payments are; how difficult it is to sell your home by yourself, and how much better it is when you trust a realtorTM; and how fabulous it will be when you wrap up all your high-interest credit-card debt into one low-interest home-equity loan. Some of the radio ads are actually stating — flat out — that real estate prices have never gone down, so real estate is an ideal investment in the future.
Seattle ain’t *THAT* different, folks!
A bit more about the National Association of Realtors
http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=486837&ct=2060785
she “takes out an 80 percent interest-only loan that would guarantee her five years of payments at a fixed rate.”
Interest only!!! That is called RENTING FROM THE BANK LANDLORD and not buying, stup*d.
It’s not renting because she will benefit from any increase in market price. That condo will be worth $600k in 5 years when the loan resets, no?
This is simply a matter of projecting historic performace into the future. It is hard to explain the risk involved to the average person who is infinitely more likely to make their decisions based on simply looking in the rear view mirror of history than actually thinking.
In the case of real estate, where the entire existing stock is marked to market at last week’s comps, the buyers at the margin control the market. This is the 2-5% of buyers in any given geographical area that are willing to pay the most for a house. Until the for-sale inventory outnumbers these people, prices will not start to come down. This is why the whole process takes so long, education does not come from logical reflection, it does not come from housing bubble blogs, it comes from economic pain. And economic pain takes time to manifest.
Everyone involved has an incentive to delay this education indefinitely, everyone.
WTF-3 years out of college in 1978 the age of 24, I was living in a ‘68 vintage 2-bedroom single wide mobile home purchased for the princely sum of $5500.00 located in the same trailer park as Stephen King. Hate to be the guy this broad latches on to…Definitely high maintenance.
new victim class coming-
vote for me and I’ll take care of the bed RE people and give you FREE health care
Well thank God she turned down that risky I/O in favor of that conservative 5 year arm using HELOC money from her parents.
I thought she was being stupid there for a second.
( as I slap myself in the forehead.)
“I was living in a ‘68 vintage 2-bedroom single wide mobile home purchased for the princely sum of $5500.00″
Sounds like my situation. Got an ‘87 mobile home I bought for $11000. If I bought one of those overpriced condo’s I be paying more for HOA and property taxes than I currently am for lot rent. Plus I have no mortgage.
Why exactly do people prefer condo’s to trailers? I’ve got just as much living space and I don’t have to share walls with anyone.
There’s a tornado with your name on it out there somewhere.
I just heard of a young lady who recently closed on a 2 bdrm condo in Irvine with a sale price of around 700k and here is the kicker, HOA fees at or near $1000/month! While I do not know the details of her purchase I can only guess this is another FB in the making.
OC-ed. and another $8800/yr in property taxes. Wow, $1700 before you even kick in to making a mortgage payment. Others have posted on here that they were renting ocean view condos in that area for $1500/mo. I would like to sell this young lady the Golden Gate Bridge for the measly sum of $10M - payable to my Swiss bank account. Are these people that dumb, that they can’t comprehend basic math? I hope she is making at least $200K per yr, or she will be hosed. Is there a lifestyle assessment charge on top. She should have about a $7000 per month payment.
I can only shake my head. But until it really hits the fan them folks who don’t see it will not see it.
I had a friend some time back who was one of those “let’s redistribute all the wealth in the world equally” kind. He was yapping his tune and I told him this. “If you put all of the money in the world in a pot and handed out an equal share to every person on the planet. In 2 years time, the people who had money before would have money again, and the people who did not would be broke.” And now I get to see my hypothesis tested. Like the eager scientist watching an experiment I am impatient and of course I want my hypothesis to be correct because I believe it is based on clear logic and sound facts. But I must be patient and wait for the results before I can say with conviction that it is now more than a hypothesis.
So I wait and shake my head as more “test cases” are added to the experiment by their own volition.
Because I believe this will not end well for them.