‘Mortgage Roulette’ Has Homeowners ‘Coming Up Short’
The Rocky Mountain News has this update on Colorado. “Thousands of Denver homeowners gambled on adjustable rate mortgage loans three years ago. Now those bets are coming up short. These homeowners are facing the hard truth that their ARM mortgage payments are going up several hundred dollars more each month.”
“‘In a sense, they were really playing Russian roulette,’ said (broker) Ed Jalowsky in Denver. ‘Russian roulette is a form of gambling, and that’s what they were doing, they were gambling.’”
“The Denver area may be hit particularly hard because homeowners in Colorado on average have little equity in their homes. In Colorado, 28.5 percent of homeowners have 5 percent or less equity in their homes, and 47 percent have 15 percent or less equity.”
“This year is on track to eclipse 2005 as the second worst ever for foreclosures. Last year, more than 14,000 Denver-area homeowners defaulted on mortgages. Increasingly, people who locked in three-year ARMs with rates in the 4 percent range are finding loan rates rising by 50 percent or more.”
“Next, the downward spiral begins: They can’t afford the higher payment, they can’t sell their homes for a profit, or they can’t refinance because they have little or no equity in their houses or they’re precluded from refinancing because of pre-payment penalties.’
“‘People were still riding the euphoria of the late ’90s (three years ago), when they thought housing prices were just going to keep going up quickly.’ So they locked in adjustable rate mortgages that had fixed below-market rates for three, five and seven years, Jalowsky said. Jalowsky estimates that 75 percent to 80 percent of homeowners defaulting on their mortgages in the Denver area took out ARMs in recent years.”
“Jalowsky is listing a home for one client who is going to see his monthly mortgage payment rise by $1,000 on June 1, when his ARM adjusts.”
“(Realtor) Brian Bartlett agrees. ‘It is absolutely mortgage roulette,’ Bartlett said. ‘”Either buyers were not informed by the mortgage broker or all they chose to hear was the answer to the following question: What is my initial monthly payment? When you combine ARMs, 100 percent financing, negative amortization, seller-paid closing costs, rising rates, falling prices, rising inventory and a continuing sluggish Denver economy, you have a recipe for 1987 to 1990 revisited.’”
“Even worse, thousands of homeowners chose so-called ‘option ARMs.’ ‘The option ARM is the temptress,’ said (mortgage broker) Pete Lansing. He wasn’t a big fan of option ARMs two years ago, when they were popular, and he lost business to other companies that pushed them. Now, he said, he is getting phone calls from people who want to refinance out of option ARMs into fixed-rate mortgages.”
“‘Usually, they’re pretty short conversations, because they can’t do it because of stiff pre-payment penalties,’ Lansing said. Now, people are wondering why they didn’t lock in fixed rates at 40-year lows around 5.5 percent. ‘One of the issues I hear over and over again from the people is that they now feel really stupid,’ Lansing said.”
“Dan Jester, a spokesman for Moody’s, said the Denver area is in decent shape because it didn’t see the huge run-up in prices that other areas have seen, so it’s unlikely to experience the big crashes that could occur on the coasts. ‘If you were Orange County, (Calif.), I’d be a lot more concerned,’ Jester said.”
“Lansing said it is too harsh to say homeowners who took out risky ARMs several years ago were playing Russian roulette. Rather, he said many of the borrowers had been lulled by years of low or falling rates and probably didn’t fully understand the risks. ‘Life happens,’ Lansing said. ‘Now they are paying the piper.’”
Denver is the canary in the coal mine. This is where SD, Sac, PHX , Miami, etc… will be in 12-24 months
No coincidence that CO is one of the few states with no mortgage industry regulation.
Same goes for OH. And same result.
Russian roulette? with mortgage rates at historically low rates (at least in my lifetime), yes. But with a .45 auto.
This version of Russian roulette has one empty chamber, and bullets in the other five…
LOL ….Getstucco …Keep em coming ….LOL again .
Agreed. Why is calling this situation Russian roulette considered “too harsh”? Would’ve thought this was the perfect term - the borrower is committing economic suicide, after all.
How could Moodies say that Denver hasn’t run up ?
Because it has not, not it the last five years. The Colorado economy has been hit so hard by the popping high-tech and telecom bubble. However, Moodies memory does not go back far enough and seem to forget the run up the area experienced from 1994-2000. And it looks like, partly helped by low rates of the last few years, it has taken longer to unravel. It makes me wonder how long it may take in other area that boomed recently. It can be a long long cycle.
POP.
“‘In a sense, they were really playing Russian roulette,’ said (broker) Ed Jalowsky in Denver. ‘Russian roulette is a form of gambling, and that’s what they were doing, they were gambling.’”
You can bet your azz, the sleazebag L/O’s peddlin’ this garbage never told anyone as such…but such is brain-dead Wal-Mart Nation.
“Next, the downward spiral begins: They can’t afford the higher payment, they can’t sell their homes for a profit, or they can’t refinance because they have little or no equity in their houses or they’re precluded from refinancing because of pre-payment penalties.”
I guess the households in question here will no longer be enjoying the wealth effect of home equity cashout financing used to buy cheap manufactured junk from China?
Denver: 28% have 5% or less equity.
47% have 15% 0r less equity.
No worries though… Dan Jenkins spokesman for Moody’s says you’re in “decent shape.”
Even the cheap manufactured junk from China won’t stay cheap much longer. China is now experiencing labor shortage everywhere and the combination of rising labor, raw materials, and energy cost is already putting lots of pressure on the supply chain. If the Fed doesn’t continue rate hike to keep the dollar from falling, all imports can easily double or triple in price.
”
(Christian Science Monitor) This article was written by Simon Montlake.
One of the defining myths of modern China — that it has a bottomless well of unskilled, low-wage laborers — is coming apart at the seams. And hardest hit are the southern coastal cities that produce much of America’s consumer bounty.
What began two years ago as a temporary blip in the steady supply of migrants to China’s export hub, where low wages and long hours are the norm, has become a constant problem for factory bosses.”
CBS news: “China’s Unlikely Shortage: Labor”
And Chinese manufacturers are grossly inefficient, there is massive oversupply in manufacturing capacity, the stockmarket and banking system do not function properly, staggering amounts of non-performing loans ….. Paper tiger.
Oh, did I forget rampant political corruption, growing regional separatism, widening class conflict, insanely high levels of environmental degradation? I’d rather have our problems.
Forgot population aging far faster than our own (one child policy) and the out-of-whack gender ratio (from aborting little girls for years).
except now the Government is paying couples to have girls because they finally realized that there is a shortage of girls to marry all the boys being born. Little girls are being sold or stolen because of it, but Chinese couples still have it ingrained that boys are preferred.
A friend of mine just called me on his way to San Diego. He was all excited; he just quit his job as a loan officer in LA. saying “There was on money in it!”
After one year of spinning his wheel (literally drove around all day) he is giving up.
I feel bad no more parties to go to with all the good looking loan officers (most of the good looking girls were former gym instructors or waitress).
“Lansing said it is too harsh to say homeowners who took out risky ARMs several years ago were playing Russian roulette. Rather, he said many of the borrowers had been lulled by years of low or falling rates and probably didn’t fully understand the risks. ‘Life happens,’ Lansing said. ‘Now they are paying the piper.’”
Sh!t happens. A future unsurprising round of bad news in the financial press will be about the implosion of lenders like GDW, whose recent earnings are heavily skewed towards accrued interest on option ARMs.
now it is wachovia’s headache isnt it? didnt they by gdw recently?
Yea — coincidently on the same day their share price dropped by over 5%. LOL!
“Lansing said it is too harsh to say homeowners who took out risky ARMs several years ago were playing Russian roulette. Rather, he said many of the borrowers had been lulled by years of low or falling rates and probably didn’t fully understand the risks.
What? Three years ago was 2003, and the Fed interest rate-cutting campaign was only two years old. Anyone older than, say, two would have had much more life experience with rates in the 7-8% range. This assertion is pure BS. Everyone knew that rates were abnormally low and wouldn’t stay that way. They just thought they’d appreciate their way out of trouble.
Some of them may have listened to Alan Greenspan extolling the wonderful financial flexibility these products offered for tapping into home equity wealth gains. Bad advice trickled down from the top …
This is why I don’t agreee with economists that predict this will be a “soft landing”. This situation is unprecedented, yet many are trying to predict the future based on the past. The ARM resets along with continued attempts to curb inflation (I think the Fed may be a little behind in raising rates) is going to have a big impact in the near future. Many people are already stretched because of higher gas prices. They must be living paycheck-to-paycheck (yikes!). How will they be able to afford hundreds more each month on their mortgage payment?
When I stumbled on this blog 6-8 months ago the RE scenario was looking much better for existing home owners and speculators. I’ve been amazed at how quickly this is turning around. If I hadn’t been doing my own research and had simply relied on the opinion of Los Angeles area RE agents, I may have been one of the many suckers who bought in at the top in mid-2005. I’m already glad I waited to see how this turned out, and I’ll continue to wait until this house of cards comes falling down.
If you live in a market where the cost of renting is half that of owning, investing the difference in high quality stocks that frequently post dividends will be a smarter choice than buying.
Exactly what I’m doing, arlingtonva. Our cost of renting is about $2500 less than what it would be to buy. The difference goes straight into value stocks (and some of the Motley Fool hidden gems). I think the market is richly priced overall, but there are definitely some undervalued stocks to be found.
arlingtonova…. see post below…. Everyone thinks they are so insulated! When was the last recession?
And PLEASE don’t tell me 2001….it doesn’t qualify…1 if the 3 Quarters were revised to positive when final….
Stocks - HA! - rock, paper, scizzors!
Comment on just about every economic news release seems to include the word “unexpected” or similar. So I don’t attach much weight to the predictions of economists.
WOW!!!!
This is awesome news………..
Who could have predicted it?????????????????
A thousand dollar a month adjustment, that is the cost of a major car repair. What happens when these people have a major car repair AND their new mortgage payment?
I use the two, because my car broke down yesterday, and I was thinking how for some people that repair cost represents JUST the adjustment on their mortgage every single month. I didn’t feel so bad about the repair when I thought about it that way.
Hmm, the added expenses of a major car repair bill, every month, what hell. I gladly paid my repair bill knowing; that it was a one-time deal (knock on wood) and how lucky I was it wasn’t an ARM draining my wallet.
Maybe next month, I will eat out enough to total a thousand dollars, and say “These nice meals are some peoples ARM’s adjustments”.
that will some serious overeating!
Don’t forget to add another $200/mo in gasoline, $300/mo in property tax, $300/mo in winter heating costs, and if you live in FL, $500/mo in homeowner’s insurance.
in miami/ftl , median of 350 k yields an avg property tax of ~$600.
$600 = labor charge for a new clutch, priceless
And if they bought a condo, they get to pay rent (oops, I mean “association fees”) on top of all that!
just don’t turn into a fat bear
They chose to hear ‘What is my monthly payment’, play a significant role in this crazy market and they should suffer the consequences.
Apparently some Lenders were telling people that they could just refinance out of these risky adjustables . Apparently these Lenders did not discuss the big whopping pre-payment penalty and new fees that borrowers would have to pay to change to the fixed ,(and you would have to have equity to do that , and only if real estate goes up would you have equity to do that ) .
Again , Im not getting down on Lenders that made a point of disclosing all the small print items ,and borrowers should read what they sign ,but ,talk about a set up for a big fall . Stuck with a high interst loan with no way out because pre-payment penalty exceeds equity . That’s the problem with real estate gold fever mania :people can only see the up side .
we don’t talk about pre-payment penalties too much around here. that can be a hellacious nightmare for the unsuspecting flipper. they don’t even know they have one until after close and the bank pockets another $5,000.
providing of course that they even close.
So gasoline takes a bite out of consumerism! Energy prices takes another, local taxes another….Now the ARMS are blowing holes into budgets. Next watch the credit card “average carrying balance”…people always hope that things will get better.
Meantime who is going to buy, buy, buy, buy…when 30% of homeowners monthly budgets are exploding?…It’s been 2 years of steady rate rises. It only takes the 5% fringe to start the spiral all down.
Where is my fall out shelter? We are way past that 5%! Just waiting for the cookies to crumble.
Gas Prices and Rate Worries Rattle Consumer Confidence
By VIKAS BAJAJ and JEREMY W. PETERS
Published: May 13, 2006
Several months of rising gasoline prices appear to be deflating some of the enthusiasm American consumers exhibited at the start of the year.
A container is loaded onto a truck in Savannah, Ga. The trade deficit narrowed in March as the country spent less on petroleum imports.
Warmer weather, higher wages and brisk hiring bolstered spirits and spending through the first few months of the year, but that upbeat mood appears to have been clouded lately by a combination of rising gasoline prices, a cooling housing market and higher interest rates, economic reports yesterday suggested.
http://www.nytimes.com/2006/05/13/business/13econ.html
OT:
CNN just had an article on Fad investing.
The lead in was after dot-com stock, real estate see what the next investing fad will be.
Somebody from CNN is lurking here!
Commodities are the next fad. It’s already started, but it will continue longer and go higher than you’d expect:
http://contraryinvestor.com/mo.htm
OT - but I find this so annoying. I hope this flipper chokes.
http://www.homeseekers.com/Scripts/detail.asp?_org_id=oc&_cstm=0&mls_property_id=S440140&_lid=0&_ver=5
Offering for $949.5k. House sold in March 2006 for $735k.
illow shows:
Value Range: $510,903 - $640,097
Looks like the dumb ass paid too much in the first place!
A large number of foreclosed properties is starting to result in suburban blight in Michigan.
Can anyone explain why, after a foreclosure, the bank would not want to drop the price as necessary to make a quick sale on a vacant home, rather than overseeing a rapid decline in value due to desuetude and vandalism?
Perhaps because it is preferrable to carry an inflated but non-performing asset price on the books rather than actually face up to loss and take the hit. Taking the loss would reduce their total assets, thereby reducing their asset vs loan ratio and bringing the wrath of investors/regulators.
Another possibility is that there are just too many people in the chain for someone to feel “responsible”. After all, the mortgage insurance company is covering the problem, right?
Its a red tape process with lenders , but they usually get the property to sale as soon as they can because they are not in the business of renting or holding property .
They are also not in the business of writing down large percentages of the value of their assets. This is a factor that may be holding them back from instituting mass sales. Just a supposition.
Banks have already “paid” for these foreclosures via their loan loss reserves. During the boom years, they have been making deductions to their net income and setting the money aside to cover loan losses and future foreclosures such as these - even when they had no/few foreclosures at the moment. This early in the down cycle, the banks have plenty of reserves to cover these foreclosures. At this point, the foreclosures won’t even affect the banks income statement. Later, when foreclosures really start to pile-up, and the banks are playing “catch-up” with their loan loss provisions, is when then banks start feeling the pain.
“In Colorado, 28.5 percent of homeowners have 5 percent or less equity in their homes, and 47 percent have 15 percent or less equity.”
Ho. Lee. Crap. Half of Colorado home owners will be under water. And we were told the bubble only exists in CA and AZ and FL. Hey your Rocky Mountain knuckleheads, what they hell were you thinking?
I guess they did not realize that tsunamis can reach a mile above sea level.
I predict that by the time the bubble fully unravels, a record number of US homeowners will be in a negative equity position.
I think lots of them already do, they just don’t know it. It’s like watching the scary movie when you scream at one of the actors, “Don’t open the door!” , knowing there is a monster behind it. It always ends bad for that person, the warning is too late.
last report, few months back, had this at 29%..(for 2005 owners w/ no or neg equity)..by now it must be creeping to 50%
I’d like to relate an experience, with Countrywide. A friend of mine took out an adjustable loan on a house here in Wisconsin, with a mortgage broker. The loan was sold to Countrywide. The house was sold, a year before the final mortgage adjusted. Countrywide sent a pre-closing statement, showing a 9800.00 penalty for paying off early. I thought that was absurd, so I checked Wisconsin State law. it turns out, that unless you were shown and signed an opt out statement agreeing to the penalty, the mortgage holder can only charge three months interest as a penalty. So, I called the original broker and ask him for a copy of the opt out agreement. he became very wary on the phone and said they didnt keep records of their loan portfolios…yea, bull…., So I told him that if he couldnt produce the opt out agreement, I would file a lawsuit against him personally. He hung up on me. Strangely enough, the next day, I called Countrywide and asked the same question….Winthin a day, the pre-payment penalty was taken of their closing amount…no questions asked..not even three months interest. So. the moral of the story here is ask alot of questions on that prepayment penalty…it could be, they just might be violating the law. Believe me if my friend would have seen that document, let alone ask to sign it, the closing would have stopped right there. I personally feel sorry for those first time buyers, that were so excited at closing, that they didnt do their homework. Please pass this info along..Wisconsin does have usuary laws, I’m not sure about other states, but read those payoff statements carefully.
WOW! Great story! Hope your friend took you to dinner.
Good for you for digging deeper . I had a friend who wanted to pay off a fixed rate note . They tried to charge my friend a extra six thousand to close because they were saying it was an adjustable note. After 10 letters back and forth with this Lender they finally admitted to me that the note was a fixed rate note and didn’t charge the extra 6K . One of the reasons they were fighting this error I believe was because the Lender had made this mistake on a number of loans . They didn’t realize that the late payment penalty clause wasn’t a adjustable clause . Can you believe it !