Exotic Loans Have Been ‘Enablers’ Of The Housing Bubble
The Washington Post has this report on a lending crackdown. “As the real estate market slows, some mortgage lenders are trying to prop up profits by relaxing lending standards for certain types of loans, endangering borrowers and financial institutions, a top banking regulator said yesterday.”
“John M. Reich, director of the Office of Thrift Supervision, warned that some lenders are making it too easy for unsophisticated borrowers to take on risky nontraditional mortgages that they may not fully understand. Reich said regulators are ‘closely monitoring’ the growth of loan types in which the payments can suddenly double, creating a payment shock that could force borrowers into foreclosure if housing values were to fall and could also cause financial losses for the lenders who make the loans.”
“John Dugan, comptroller of the currency, who also spoke at the meeting, echoed Reich’s concerns about the volume of commercial real estate lending. He also likened it to the lending pattern that preceded the savings and loan bailout of the early 1990s.”
“But a regulatory crackdown on the loans, known as interest-only and option mortgages, could prove problematic for some pricey real estate markets, such as the Washington area, where buyers have become increasingly dependent on such loans.”
“About two-thirds of all people who bought homes in the Washington area in 2005 used interest-only or option mortgages, many of which have adjustable interest rates, up from 2.2 percent in 2000.”
“‘These types of products have been enablers when it comes to allowing home prices to rise,’ said Christopher Cruise, a Silver Spring-based mortgage trainer who runs classes for lenders and regulators around the country. ‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’”
“‘If people suddenly can’t get an interest-only loan because the feds are clamping down on how many are out there, it’ll drive the market down,’ said Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers. ‘It’ll have repercussions for market values,’ because fewer people will be able to buy or people will buy less-expensive homes than they might otherwise.”
Is there any way to get information about the percentage of exotic loans used to finance home purchases in specific geographical areas?
from the article:
Oops! from the article:
“About two-thirds of all people who bought homes in the Washington area in 2005 used interest-only or option mortgages, many of which have adjustable interest rates, up from 2.2 percent in 2000, according to statistics compiled by LoanPerformance, a real estate information firm. “
2/3 = 67% — that would be a 2,945% increase in percent of interest-only or option mortgages over the 2.2% level way back in 2000 — a pretty brisque rate of financial innovation there. Something tells me that demand might fall off just a bit if the Johns back up their rhetoric with action.
(I have seen similar figures for California bubble zones.)
I don’t know anyone who has bought a house in LA in the past 2 years using normal fixed rate financing.
When we were blindly bidding for houses last summer, we were using a fixed-30-yr w/approx 40% down as our cost basis. Our agent and our mortgage broker kept trying to talk us into an “exotic” loan, and we finally agreed to a fixed-30-yr optional 10-yr interest only loan because it was only .15 pts higher interest rate than the normal fixed 30-yr. Even that concession they found exasperating because if we had gone with an ARM, our “affordability” would have gone up by 20%-30% vastly increasing the range of houses available to us.
At the end of the day, we didn’t buy anything, and good lord, do I sleep better at night in my nice cheap rental house.
and in early 2000 everyone had tons of cash from NASD stuff- this is insane
TREASURY 10 YEAR BLOODBATH TODAY!!! 4.96%!!!! 4 YEAR HIGH!!!!!
I guess it is time to revisit that NY Fed study that treated long-term interest rates as a “fundamental” factor. Now that this fundamental has adjusted back to its level of four years ago, where is the fundmental value of housing?
MORTGAGES
Mortgages at 31-month high
http://tinyurl.com/eml7c
By Steve Kerch, MarketWatch
Last Update: 12:16 PM ET Apr 6, 2006
(Updates to correct number-of-month high on 30-year mortgage. NOT THAT WE SUSPECT THAT NUMBER MIGHT KEEP CLIMBING FOR THE FORESEEABLE FUTURE OR ANYTHING
)
“CHICAGO (MarketWatch) — U.S. mortgage rates continued to push higher in the week ending Thursday, with the national average rate on the benchmark 30-year loan hitting 6.43%, its highest level in 31 months.
Freddie Mac in its weekly mortgage survey said the 30-year climbed from 6.35% a week ago. A year ago at this time, the loan average 5.93%. The 30-year hasn’t been this high since Sept. 4, 2003, when it stood at 6.44%.”
Can somebody help me out here? Because if I understood that NY Fed “No Bubble Here” economic study of a couple years back, it said that low mortgage rates were a fundamental factor that supported the high housing prices. So does that mean that the fundamental value of housing has now retrenched to its level of 31 months ago? Or am I off base here, since housing prices have reached a permanently high plateau?
The real estate train will not slow until rates push into the 9-9.5% 30 year-fixed range as they did in ‘94 when Greenspan did his thing.
P.S. Unless some other fundamental factor has changed which the news media has kept secret, then the same “fundamental” medicine for housing valuations applies to the stock market — higher l-t treasury yields imply that stock prices should fall (unless fundamentals no longer matter up on this high plateau of prosperity which our economy has reached…)
You forgot “permanently” — this permanently high plateau of prosperity. I know ALL of us here at HB Blog count that as one of the most quotable phrases ever.
Hmmm!
There are always the old standbys:
“A chicken in every pot”.
and
“Prosperity is just around the corner”.
30-Year 4.500 02/15/2036 91-19/5.05
Let’s get the ten year up to a minimum of 5.5%. Actually I’d like to see 6.5% or 7%. ‘Get the children off the street’, like when you’ve just been raised by a pair of pocket kings with one showing on the board.
‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’”
——————————-
HOLD ON! These loans should have never been in place, much less used by everyone and their grandma. This is the big set up to blame regulators for the coming crash. They will say the Fed’s took away the punch bowl, when in fact, it should have never been there in the first place.
First they said that the “housing boom” was based on sound fundatmental forces. Now they say if buyers can’t get suidcide loans it “could precipitate a disaster of epic proportions.”
So what should be done in their minds? Come up with crazier and crazier ways for buyers to go deeper and deeper into debt. Madness!!!
The truth is more like… without these products home prices couldn’t have flown so far away from the fundamentals in the first place. In order to ensure a sustainable market, products like these should NOT be mainstream lending products.
The lenders have been “riding the tiger” for 2 years now. They know they should tighten lending standards, but if they do they will guarantee a colapse in prices. They can’t get off.
“Without these products, homes couldn’t be purchased”
Let’s see… these “products” weren’t really in use much back in year 2000. And we all remember that back then, homes “couldn’t be purchased”. In fact, for all of human history until ,just now, homes could never actually be purchased. Thank God for suicide loans!
So according to this theory, I never did purchase my home in 2001, it was just an illusion….wow LOL.
Funny, because I thought that without these loans, homes could actually be purchased instead of renting them from the bank via an I/O loan at more than double the cost of renting from a traditional landlord.
It’s good that someone is finally thinking about the regulation side of this bubble. We could have prevented it in the first place with logical regulations.
At this point though, depending on what the regulations are, this could be the final nail in the bubble burst coffin.
-X
BubbleTrack.blogspot.com
I totally disagree with outlawing these types of loans. Investors will realize how risky they are, and stop buying them up. The market will correct itself. The government is not here to protect us against our own stupidity.
I agree, and I’m all for letting whoever is left holding the bag lose their shirt. But the problem is that I cannot see the government taking a “hands off” approach as this unwinds. Taxes will go up in order to bail out Fannie and Freddie. And taxes may go up to help the “poor” homeowner who is facing foreclosure. I can see it coming.
So, if Joe Taxpayer is going to bail out all these people, then maybe we should restrict the loans in the first place.
I suggest we take a poll, and anyone who agrees with lainvestorgirl in the “keep the govt off the people’s backs” school of lending should be named personally liable when it is time for the bailout…
I think her point is to keep the gov’t off of people’s backs (including foolish banks), is worth exploring but ultimately a losing argument. The “hands off” approach to government works under the theory that private sector are more efficient than those that are regulated, but as we’ve seen from many posts, markets work best when they are transparent. This one clearly isn’t. Yesterday’s thread about accounting rules for accrued interest with Option ARMs is a perfect example of how there will be a lot of surprised bag-holders in this.
As a funny aside, I read this the other day about the “goat bubble”. If you’ve seen it before, my apologies.
http://tinyurl.com/zfzz7
For better good I expected Govt. to protect people from their own stupidity. Without that an average person will always be vulnerable to sophisticated scam and ploys by the smart.
Like Govt does not allow ponzi scheme. Like the Govt would not allow so called Medical Marijuana
I am disappointed that Govt let this happen. It affected us ALL. There is no mistake LOT of people became rich over the last 2 or 3 years and they moved out of market by this time. Due to this easy money prices have gone up and will remain so after all correction, IMHO.
Many are going to pay for it, including me, who never bought, will have harder time to buy. As I expect no way the govt / fed can allow the price to fall too much, though they allowed price to be up 100% in 2 years in So. California.
Well,if the government is going to bail folks out, it must raise taxes to do so. How about a special retrospective capital gains tax on property sold in the last few years? That way, the people who benefited from the bubble can help contribute to the clean up?
How about a special retrospective capital gains tax on property sold in the last few years?
That sounds like a great idea. My biggest fear is that even though I rode the bubble out renting and saving, I’m going to lumped in by the older folks “oh the Starbucks generation and their over-consumption did this, so tax them more to pay for my Social Security…” etc. I’ll be pushing 40 by the time prices come back to earth and I can buy my first home, and I’ll need every dime I can get to pay off housing for my family by the time I retire…
Your biggest fear will be realized. I’m in the same boat — grad high school in ‘92, out of college by ‘97, started saving in ‘99, now I have a six digit nest egg that’s been deflated into nothingness, along with the knowledge that while I’ll likely rent forever and have to work at least part-time until I’m dead, the generation ahead of me is going to keep inserting their fist in my behind while squawking about Hummers, $5 soy lattes, and McMansions. I NEVER support ANY sort of boomer subsidies, be it prescription drug programs or whatever else — they’re not going to quit engaging in various forms of economic warfare with us, so we should at least return the favor.
“How about a special retrospective capital gains tax on property sold in the last few years? That way, the people who benefited from the bubble can help contribute to the clean up?”
I propose a special retrospective tax on any US household with accumulated wealth to pay for the mess which is about to unfold.
Oops, I guess that is just what Uncle Sam had planned…
Have you ever considered that the reason that this happened in the first place is that the government makes a habbit of bailing people out of there own stupidity? People need to be allowed to fail, otherwise they don’t take precautions and they make idiotic financial/life decisions because there are no consequences. They’re adults and they need to act like it.
Just a thought.
Sound logic like that will never prevail in a society that views everyone as a helpless victim of their environment.
Wait a second, fiscal responsibility??? That’s so old fashioned, don’t you know that the current mantra is to borrow, borrow, borrow and spend, spend, spend? Someone else will pick up the tab. Whether it be the next generation (for government excesses), or the banks, for those who go BK, or the government in some sort of bailout.
OCMax, I’m in the same boat as you, graduated college in ‘98, still renting, saving a ton, and my expectation is that there will be no Soc Sec when it’s time for me to retire.
Who will protect the people from the biggest ponzi scheme of them all, Social Security and Medicare?
ok… First..
it’s retroactive, not retrospective. Sorry, just hadda clear it up.
2nd, while entertaining, it is of course incredibly impractical. Prorate by when/where you bought it?
I will make a concerted effort to dispose of my capital gain real estate (located in non-bubble areas), prior to Jan 09 if Democrats take over. Chas Rangell will be chrm of Ways and Means and will be raising taxes like crazy and if Kerry II or her Hillaryness is in charge the socialism of America will continue. Amnesty will prevail. Goodby social security as 30 million more Greasers will swim the river.
But banking regulators ARE supposed to be keeping banks from going out of business due to their greed and irresponsibility and taking their depositors’ money along with them. In that respect, the regulators are way late to the party. I think they should be taking a much harder line with the lenders.
keeping the govt. out might make sense if the govt. kept out of everything. But, via the FDIC, govt. is already committed to bailing out depositors. With that as a given, preventing banks from making risky bets with other people’s money (depositors ultimately to taxpayers) is a necessity. Even Milton Friedman suggested two very distinct financial sectors - a guarnteed, highly regulated sector, and an unregulated, unguaranteed sector. You can’t allow unlimited risk taking in a sector with guarantees.
It is here, or should be here, when people’s stupidity threatens those of us who are not stupid. Really, the response to this article should be one big “duh.” I know very little about the more esoteric financial items discussed here, but from a general business standpoint it was obvious that for momentum to continue, standards had to be relaxed. Everyone who wanted to buy, and who was a good credit risk, already had bought, often more than once.
We had banks where I live–and we may still have them–that weren’t even doing background checks on mortgage loan applicants. It reminded me of my time in tech during the internet stock era, when speed of decisionmaking, rather than the underlying correctness of the decision, was what was valued. We all know where that got us.
Great post!
I don’t think we should outlaw these types of loans at all. BUT they shouldn’t be used for people who CANNOT afford a home and could not qualify for regular financing BECAUSE they aren’t qualified for the purchase.
Housing prices took leave of all economic sense with these products handed out to every Tom, Dick and Jane who didn’t even have the income to support such huge purchases. That is not kosher… everyone pays the price for this kind of stupidity, and the real estate agents and mortgage brokers profit from this… I think there ought to be a backlash so swift and hard that it becomes painful to be stupid.
I’m not a fan of the government meddling in a lot of things, however, it is clear that this sector cannot regulate itself. (They have become the small child whose parents aren’t looking.) It was given too much freedom, they exploited it and now it will cause grief for everyone, including all of us.
The return of the risk premium is about to show its ugly head. I’ve read some interesting data that supports 10 year at 6.00+, and mortgage rates to 8.00+. Screwed, blued, and tatooed.
And the risk premium will be especially bad on exotics. That’s whats going to bring back the standard 30 year amortization schedule, if not fixed rates.
“‘These types of products have been enablers when it comes to allowing home prices to rise,’ said Christopher Cruise, a Silver Spring-based mortgage trainer who runs classes for lenders and regulators around the country. ‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’”
This is absolute crap. Without exotic loans, the home prices will fall, and people will not NEED exotic loans to afford their house. I would claim that people are not “happier” with their home purchases today than a decade ago. They run scared into a purchase for fear of being forever left out, and now run scared from foreclosure as their “affordability-enhancing” mortgage product chops them off at the knees.
Think about it. Which world makes more sense? A world in which prices are reasonable and people can put down 20% and get fixed rates. Or a world in which prices are obscene and people must stretch themselves to the limits in order to buy?
Right on! Stop spiking the housing market punch bowl with exotic financing (aka suicide loans) and you will quickly get your affordability, given the record pace of building going on all over the place.
That’s why this bubble must stop right now . Making more creative loans just to get unqualified people in at prices that will
drop in the near future is crazy crazy crazy .
the same can be said of many other types of loans (like all the fraudulent over 10x income loans in Europe) and housing subsidies (like HMD, free starter loans and all the other crap): the politicians or companies who introduce them always claim that it is good for starters, low-income families etc. because it makes housing ‘affordable’. But the reality is that it only drives up prices further and benefits only the rich (especially people who own more than one home).
of course, that also means that regulations to clamp down on this will take a very long time because it will hurt the wallets of the rich.
We move a bit quicker on such matters over on this side of the pond
They don’t even have fixed rate notes in Europe anymore do they rhz?
Exactly.
Go Johns! (Dugan and Reich)
“But a regulatory crackdown on the loans, known as interest-only and option mortgages, could prove problematic for some pricey real estate markets, such as the Washington area, where buyers have become increasingly dependent on such loans.”
Luckily this problem is limited to only a few pricey real estate markets out on the coasts. Inland places (like Denver) have nothing to worry about…
in 80’s there were neg am loans, but no one I knew ever used one- WOW it is different this time
One of the few times I agree with the “its different this time”
Luckily these were only marketed to rich business owners who made tons of money in some years and quite a bit more than that in others…
During the ’80s as a farmer I used a form of neg-am loan that allowed different levels of payments with no penalties (other than a slightly higher interest rate for the privilege). Worked fine as my income bounced from sale to sales and year to year. But farmers live in a world of fear anyway (weather, crop failure) so they normally error to the side of financial caution, probably making them as a group one of the soundest users of such loans. But for the common joe homeowner? Madness!
Farmers are professional risk managers; joe homeowner has not a clue about risks…
I remember talking to somebody who was gettin one in 1985 or 1986 when I was in college. I didn’t understand how somebody couldn’t be terrified of the words “Balloon payment” The interest rate was higher than my credit card charges now.
Why is “balloon payment” so scary? What happens when one has a mortgage and refinances or sells their home (hint it rhymes with saloon basement).
In theory, a refinance or sale happens when you *want* to refianance or sell. If rates are way up, or prices are way down, you can say “ummm, I think I’ll wait”. Try THAT with a balloon payment.
OT a little bit. I know I should be looking at the median of home prices, but I can’t find anything that is not 6 months old. Only average. I have been able to put this together. A news paper artical from 10/2005.
http://news.rgj.com/apps/pbcs.dll/article?AID=/20051021/BIZ12/510210398/1083
Carson City’s median dropped 7 percent from August, to $323,000. The average dropped to $363,058. Sales volume increased in Carson City to 69, up from 52 in August.
Then I have this from a realitor.
http://realtytimes.com/rtmcrcond/Nevada~Carson_City~paulcrooks
There were 130 homes sold in Carson City from January 1 to March 31, 2006. The average price of homes sold during this period is $309,877.
Is that as huge as it sounds? $363K to $309 in 3-6 months? Keeping in mind that the average for Sept had “dropped” (so it was not freakishly high because someone bought a 20 million dollar home) and the second was for a whole quarter.
“If people suddenly can’t get an interest-only loan because the feds are clamping down on how many are out there, it’ll drive the market down.”
The “feds” are late to the party. The MBS market drives the mortgage loan market and lending standards.
‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’”
Do you hear this sh*t?! This is like saying, “Oh, we can’t take the heroin addict off the heroin becaust he’ll go thru a painfull withdrawl process. Best to just keep the heroin coming.” What a bunch of friggin’ morons!! Yeah, the “debt junkies” are going to go thru some serious withdrawl, but the end result is healthy. The sooner we stop the flow of these bullsh*t loans, the sooner we become a “sober economy”.
People don’t want to sober up.
builder incentives:
1 year HOA’s
1 Year mortgage
1 Year heroin supply
Well with herion addicts they replace their drug with government sanctioned methadone. Leads one to wonder what form of methadone the gov’t will come up with for the debt junkies.
Good! They NEED to go through withdrawals!!! They need to feel the pain from the junk that way they learn!
‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’
Gee, and that’s why I used a Realtor(tm) to purchase a house because he is separated from regular RE agent because he took ethics courses and I know he wouldn’t lead me astray and put me in a house that I just couldn’t afford. It’s time to rethink the RE profession here in CA. My rule has always been never buy from the listing agent, now it’s gonna be buy from discount broker or do the paper work yourself.
NoLo Press and others have books, that go line by line in contract definitions that are available at bookstores. Granted, 1/4 the book is supporting the R E “Professional” (loose definition of the word), but the legal information is there too. Also, many Assocation headquarters have bookstores, that the public might be able to buy through. Just play down you’re an FSBO, or a Discount Broker “type” when you’re there. “Real Estate Practice” a required course for R E Agents, is a great source on how the “game is played”, and is on a per state basis. Just My Humble Opinion.
Dude be honest, Really just how much did the “Real Estate Practice” course show you about how the game is played. Took me all of 2 weeks to toss that info.
The actual concept of the ARM loan is good for the secondary market because they like a loan that adjusts with the market conditions Not a good concept when you put unqualified people on the loan in a false price market . ARM’s , not a good concept if ARM’s are use to fuel the gold fever with a high percentage of those loans used by short term flipper/investors that get caught not being able to sell.
That is pretty scarry to think that so many people are using interest only loans just to afford a house. I remember the first house I purchased 20 years ago was a lot of work. I had to actually “qualify” with enough income to purchase the home and had to come up with 20% down. I am sure a lot of us remember those days.
Yes - and it’s further compounded by the fact that the concept of someone buying a “starter home” has fallen out of favor. So these 20-somethings feel like they deserve to have a McMansion from the get go but the only way to afford it is an exotic loan.
Then they’re in over their heads… and have little life experience to deal with it.
You are so right Spunkmeyer.
‘Without these products, homes couldn’t be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions.’”
BRING ON THE ‘DISASTER’ OF EPIC PROPORTIONS!
HURRAY!
(You know they’re getting really, really desperate when they start talking like that…)
…or could you call it…
AN EPIC ENEMA OF FINANCIAL PROPORTIONS!
(I like that better.)
That comment just smells to high heaven!
http://www.ots.treas.gov/
send a copy of your comments or a link to this blog to John Reich
i did
WHATEVER HAPPENED TO “FEED THE SQUIRRELS?”
That was so 05 ish…The new paradigm:
Squirel Recipes
http://www.backwoodsbound.com/zsquir.html
LOL! On a more somber note, my mom, who was a child during the 1930s, used to recount her father’s efforts to get the kids to eat various forms of squirrel meat, which she steadfastly rebuffed.
My grandfather always tells a story about he’d get so hungry during the Depression that he’s go into the backyard with a salt shaker and pick rhubarb, sprinkle with salt, and eat it. He has another story where one kid at school, whose father owned the town’s grocery store, used to have an apple every day. He’d shout “CORES” when he finished eating it, and toss it in the air, and everyone would clamor to get it to nibble the remaining fruit from the apple core. People these days just have any concept of hardship or sacrifice like that.
John D. Rockefeller (Standard Oil) use to hand out newly minted silver dimes, highly prized during the Depression and evidence of his ‘philanthropy’.
Rockefeller was also noted for his donations to the University of Chicago, which was memorialized by the following ditty sung by the students:
“John D. Rockefeller, wonderful man is he, gives all of his spare change to the U of C.”
Yeah, isn’t John D. Rockefeller, the benevolent dime hander-outer, the same guy who ordered the machine-gunning of striking West Virginia workers who were trying to organize?
OT: But the bond market is getting creamed today. Absolutely walloped. Long bond yields up more than 9 basis points. For those of you who are technically oriented, 10-year yields have now blasted above key resistance dating back to April 2004. We’re at the highest yields since June 2002 (4.97% currently)
This just goes to show that all those people who said “sure, this loan is risky, but I can always refinance later” could well be sorry. Maybe interest rates will come crashing back down at some point. But anyone coming out of their adjustment period in this interest rate environment is well and truly fuc*ed.
By the way — how about that Alan Greenspan speech back in February 2004 extolling the virtues of ARMs? While he’s off making $100,000 a speech (or whatever his fee is), anyone who listened to him is probably on their way to the lawyer’s office to file bankrutpcy. Got to love the genuises at the Fed.
Nancy said: “I remember the first house I purchased 20 years ago was a lot of work. I had to actually “qualify” with enough income to purchase the home and had to come up with 20% down. I am sure a lot of us remember those days.”
Even six years ago when we purchased our last home not only did we have to qualify for our fixed rate loan on the basis of our income but, since we were in a State sponsored program, we were required to take a short course and test on finances.
It was a nice little townhouse we had in Alexandria, but I’m so-o-o-o glad we got out in time!
Treasury yields are going to places that are going to put these exotic borrowers in a world of hurt. With a slightly inverted yield curve, a lot of these borrowers could jump from a floating rate loan to a fixed rate loan with some pain, but without foreclosure.
As the yield curve goes back to something more normal(ish), that move from floating to fixed will be MUCH more difficult. People are going to be hurting big time.
The reason why the banking industry started making adjustable loans in the first place back in the early 80″s is because the secondary maket started balking at fixed rate notes for 30 years. Lenders figure that the average loan is changed within 7 to 10 years ,(borrower either moves up to a more expensive home , job changes etc.). The industry had to come up with something that the secondary market of investors would buy .Question….Would you want to tie your money up for 10 to 30 years on a 5 to 6% yield ? Also the banks did not want to get caught holding low rate loans when they might have to pay their depositers higher yields .
The original adjustables started out at about 2% profit margins over and above what the lenders were paying for their money .The adjustable could move up or down usually 5% thru the life of the loan . The new adjustables have higher profit margins for the lender ,( higher margins ), they have more potential for negative amortizing , and apparently higher down payments weren’t required to protect against neg. amortizing . Further , alot of people apparently didnt qualify for the adjusted up rate from the teaser rate on the adjustables .You have to be even stricter on the underwriting on a adjustable because of the increase negative amortizing potential .This is why the industry pushed adjustables . Apparently the industry relied on the false notion that real estate always rises .
in other words , the investors in the secondary market were not going to put up the money for loaning unless they were protected from future interest yield increases on long term loans .
What kind of risk does the secondary market prefer — yield risk, or default risk? I would prefer yield risk myself, because what goes up often times eventually comes back down again, but has anyone ever heard of a loan which went into default, but then was later reinstated when the borrower got back on his feet?
Apparently secondary market wants to go with default risk .Sometime lenders will work with a borrower in trouble by a refinance given if the borrower hasn’t avoided the problem and waited until the last minute .
all true, and an additional problem is that caps are additive, and not proportional. when annual rate increases were capped at 2 percentage points per year, ARM rates were more like 6 percent or higher. Add a percent for amortization and a percent for taxes, and the payment was about 8%. So if it went up the maxiumum for the year, it went from 8% to 10%, or a 25% increase in payments. With initial ARM rates down around 3%, and no amortization, you’re now in the position of the rate going from 4% to 6%, a 50% increase. The payment shock risk was much bigger for 2003-2005 originations than it was for the ARMS originated in earlier years.
20 years ago the industry was talking about getting rid of fixed rate notes forever because of their lack of saleability in the secondary market . The fact that lenders even offered these low fixed rate loans in the last 5 years has been remarkable . Again I stress , the adjustables are dangerous in a declining price market .
AND, when you are starting out at 40% of your income to pay your ARM mortgage, it is very difficult to absorb a 25% increase in your payment, let alone a 50% increase in payment. And forget about selling your house, since no one else can afford it either.
I think there is a serious cirises abrweing with all these banks and coming bad loans. Does anyone know if theres been issues in the UK or Australia?
Simmsays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
These comments about risky loans … is this an acknowledgement of failure of regulators to step in, or are these to avoid blame ? These comments should have been made by such folks at least 2 years ago. I think, “Save Your A$$” game has started.
With interest rates at historic lows, why were people encouraged to take ARMs ? When the only possibility is that rate will go up ? ARMs are an interesting bet, when interest rates will be LESS when the loan resets, not more.
The people who are giving these warnings NOW are doing that, so that later on thay can say “See, I told you so”.
People, most likly bad times are ahead of us. Everyone now should try to position their finances in anticipation of the crash. I am myself trying to figure out how to get ready. I am not waiting for some regulators or govt agency to find a solution. They will always be late.
Actually if you took out a adjustable in in the early 80″s you ended up averaging lower than the fixed rate note for 20 years .Of course now its unlikely the adjustables will average lower than the fixed in the future .My ARM that I took out in the 80″s actually went down as low as a real rate of 4% .
Buy gold and silver, they are a good hedge against the dollar. When shoe shine boys and cab drivers start telling you to buy them, then it’s time to sell.
I just spent the morning running annual historical comparisons between Gold/Oil and Gold/Dow Jones. Even at $600, gold hasn’t been this “cheap” since 1971! Also, I posted this under yesterdays “Inflation” topic http://thehousingbubbleblog.com/?p=438#comments
Pointing out that the late 70’s /early 80’s bubble wasn’t necessarily a result of easy money lending as it is today.
CONTRACT RATE ON 30-YEAR, FIXED-RATE CONVENTIONAL HOME MORTGAGE COMMITMENTS
DATE , MORTGNA
1972, 7.38
1973, 8.04
1974, 9.19
1975, 9.04
1976, 8.86
1977, 8.84
1978, 9.63
1979, 11.19
1980, 13.77
1981, 16.63
1982, 16.08
1983, 13.23
1984, 13.87
1985, 12.42
1986, 10.18
1987, 10.20
1988, 10.34
1989, 10.32
1990, 10.13
1991, 9.25
1992, 8.40
1993, 7.33
1994, 8.35
1995, 7.95
1996, 7.80
1997, 7.60
1998, 6.94
1999, 7.43
2000, 8.06
2001, 6.97
2002, 6.54
2003, 5.82
2004, 5.84
2005, 5.86
“With interest rates at historic lows, why were people encouraged to take ARMs ? When the only possibility is that rate will go up ? ARMs are an interesting bet, when interest rates will be LESS when the loan resets, not more.”
Because it was “easier to get approved”–that’s what I was told by a bank. The banks by and large didn’t care what the credit risk was, they were bundling the notes and selling them to investors as quickly as they could. They earned the origination fee, and a spread on the pool of loans. Defaults are the investors’ problems.
As defaults begin to occur on these loans, spreads will increase, lending standards will tighten, since the issuers are going to potentially need to hold the paper if there are no investors to buy it, and exacerbate the problem further.
I’m with you. It feels like a mini-armageddon (did I spell that right) may be on the way. Makes you wants to buy some gold and bury it in your backyard. Oh wait, gold is at a 25 year high, so much for that. By the way, what’s the consensus about metals? How far up do you all think it will go? Any comments about where we should position ourselves during this crisis?
If the crash is global and everything goes to hell, the way I see it, you have 3 options in a worse case scenario, not necessarily in this order:
1. Gold and Cash
2. US T-bills
3. Free & clear real estate (payoff if you own)
4. A warehouse full of essentials, like toilet paper
OT, I had to post this Craigslist ad. Originally asking $1.1M but now you can get it for a bargain at $950K. You have to click on the link to see the pictures. I am just speechless….
Sorry, forgot to put the link. Here it is: http://sandiego.craigslist.org/rfs/147846947.html
OMG. It’s like your own little slice of Appalachia in San Diego County. I mean, lots of sellers are smoking crack, but based on those pictures, I think the sellers are LITERALLY smoking crack. What a dump!
Somebody should’ve told them that water damage is not a selling point. Neither are pictures of boulders pushing against the foundation. But alas another smart guy.
This freudian slip tells you all you want to know about this property.
“The master sweat has a private bathroom with a custom shower and Stone tile floor” keyword “sweat” it’s apparent from all the pictures.
They’ve obviously never watched HGTV’s “Design to Sell.”
I am rendered speechless by the Coca-Cola themed dining room.
Abomination.
Another OT, but look at these price reduction off of Zillow, along with the purchase price and date…
This is in Merced,CA.
Price Reduced: 12/26/05 — $320,000 to $299,000
Price Reduced: 01/18/06 — $329,999 to $295,000
Price Reduced: 02/28/06 — $295,000 to $284,950
Price Reduced: 03/10/06 — $284,950 to $270,000
Price Reduced: 04/01/06 — $270,000 to $261,000
Price Reduced: 04/05/06 — $261,000 to $259,900
Purchased 9/10/05 @ $260,000
Current Zillow estimate: $251,000
Wow. Looks kinda like the desperation of one of the last & greatest fools as the once blinding bright dollar signs flicker and fade from their eyes like an old busted neon “vacancy” sign.
This is priceless.
Or should I say priceloss.
The guy tried to bag $60K in 3 months, and is now below his purchase price. Ha!
SDGAL. Does that CL house include the dog in picture 1 and the bright red in picture 3. This posting looks like a joke.
No joke. I checked to see if the listing was on MLS. It is MLS #064013212. See http://tinyurl.com/fbgmc.
I looked it up on ZipRealty and saw the price was recently reduced from $950K to $800K-$900K range. I am not sure why the listing on Craigslist (posted 4/3/2006) is listed at $950K when clearly the price was reduced on MLS on 3/28/2006 to $800K.
You would think that they would have at least cleared the clutter, junk cars and hideous wall decorations before they posted the pictures.
I don’t know… looks like a great place to grow your own weed and smoke a few bowls while hanging out in the hot tub!
Speaking of bubble enablers, how about borrowing your next RE investment loan from The Donald & Son?
http://tinyurl.com/lanbb
And it wasn’t that long ago that everyone in the industry was defending these things as the future of home loans…
BTW, saw THE Donald’s mortgage co… what a trip. Don’t think he’ll be looking for borrowers in my tax bracket.
Cole @ The Boy in the Big Housing Bubble
The bad part isn’t that lenders put people on adjustable rate loans . The bad part is they allowed risky borrowers to go on adjustable rate loans with low down payments in a speculative market .Lenders are at risk on the fixed rate loans because the yield might not be high enough in the future . The problem with home mortgages and has always been for years is that the Lender is risking what rate the lender charges with what the lender has to get in yield in the future to pay investors/banking deposit customers etc. etc. A 30 year note is a long time .
“Reich said regulators are ‘closely monitoring’ the growth of loan types in which the payments can suddenly double..”
They should have been closley watching from the very beginning, it’s a little late now.
“But a regulatory crackdown on the loans, known as interest-only and option mortgages, could prove problematic…”
It’s already problematic. These exotic loans are going to be a huge part of the problem we will be experiencing in the next few years.
‘It’ll have repercussions for market values,’ because fewer people will be able to buy or people will buy less-expensive homes than they might otherwise.”
Those fewer people have been buying less expensive homes in the first place. You can’t buy less expensive homes now anyway, because they are overpriced.
Absolutely!!
Close monitoring should have been done 2 years ago. DOING something about it should have been a year ago anyway. There was plenty of evidence that this problem was brewing. And if they had devised a crackdown THEN and sent a stern message to the lending institutions that they would be scrutinized both for loaning money to those who clearly couldn’t pay (and be partially responsible for these loans if they go bad) as well as investigating for fraud, we wouldn’t be here now. The tightening would have already begun.
Hurting market values? We’re well past that!!