You said it. I didn't. What goes up must come down. Source
Posted on 01/02/2006 10:11:01 AM PST by ex-Texan
Now comes the hard part for holders of certain loans
You know those cheap mortgages that everybody's been getting to speculate on housing? Where somebody at the other end of a toll-free phone will lend you $200,000 and your payment will only be $678 per month?
Lenders who started making those teaser-rate loans a few years ago are getting ready to charge real-world payments on them.
Starting in 2006 and accelerating into 2007, as much as $2.5 trillion worth of the fancy mortgages called "hybrids" are coming to the end of the free-lunch part of the deal.
And while prices in Southwest Florida are hovering at twice those of three years ago, the house party seems to have ended in July. Since then, as mortgage rates continue their upward creep, inventories are stacking up, while the rate of closings is slowing down.
The best-case scenario for the future, the one from the real estate agents, is that prices will level out to single-digit appreciation rates.
Assuming that scenario, some would-be investors -- those who took out highly leveraged loans with extremely low payment options -- could soon find themselves owing more on a house than it is worth.
That's called being "upside down" in a loan.
Many more will simply find that their monthly bill has instantly risen by roughly the amount of a car loan. The reason is that after their initial one-, two- or five-year interest, their loans are now scheduled to "reset" at more realistic rates, and will continue to do so, usually for the life of the loan.
Economists are still trying to put numbers on this reset factor, particularly when it comes to the riskiest home loans, referred to as "sub-prime."
"We don't have enough data to know how big a problem this will be," said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager.
For now, though, the lending party is still going strong.
"The mortgage business has been banging for the last five, six years," said Marta Grande, managing broker at Sarasota's Commonwealth Mortgage. "It has just gone crazy."
Personally, Grande likes what a borrower can do with an adjustable-rate mortgage, or "ARM."
"I've owned six homes, and every one of them has been an ARM. But I tell people today to get a fixed because I think rates are going to go up."
The ticking clock
Sarasota's John Barron is typical of the new crop of homeowner-investors. He and his wife, Lauren Wood, are sitting on big profits at ts at their two 2004 purchases in the up-and-coming Gillespie Park neighborhood, close to downtown Sarasota.
But the couple made their big moves using ARMs that are about to be reset. If they don't act soon, their monthly bills will rise by hundreds of dollars per month.
They used two separate three-year, interest-only, adjustable-rate mortgages from SunTrust Bank to buy the homes within the past two years.
And there's more, Barron said.
"Besides the two ARMs, we also took out a home equity line on the Seventh Street house to put down a deposit on the Fifth Street house. There was no cash that we had in our pockets to put down on the Fifth Street house. All we had was our shining credit record. And the faith that the banks have in this real estate market that allows you to borrow 100 percent."
If they don't sell, with interest rates rising, the couple will have to refinance the loans.
Barron and Wood have a lot of company, says Paul Kasriel, chief economist at Chicago-based Northern Trust.
With possibly $2.5 trillion in household debt that is going to be repriced higher "the household debt-service ratio is bound to climb to new highs," Kasriel wrote last month.
Even before the reset gets under way, households were devoting a record 13.75 percent of their after-tax income to servicing debt, including mortgage debt.
And the screaming housing boom of the last three years?
"There will be an end to it. I think it is going to be related to further increases in interest rates," Kasriel said during an interview.
"Asset bubbles are characterized by cheap credit. Usually what bursts a bubble is higher cost of credit, because that is what inflates the bubble, is cheap credit."
Risky but not riskiest
In the Sarasota-Bradenton-Venice region, prices for existing single-family homes have risen at one of the fastest clips in the nation during the past three years.
Prices in Sarasota-Bradenton-Venice have risen 93 percent, a rate roughly triple the national average and well ahead of the 79 percent growth rate for the top 20 metro areas in the nation.
But the feverish activity seems to have dried up.
In July, only 1,626 existing single-family homes were available for sale in the Sarasota market, and Realtors were closing sales at the rate of 156 per week. Dividing that sales rate into the number of listings, it was a 10.4-week supply of homes.
Very Long Article
Rates have barely budged in 2 years. I paid 7.875% in May 2000, and re-fi'ed at 5.9% a year ago. It is now 6.15%. Big whoop.
5.70% overnight average on a 30 year fixed rate conventional mortgage, and falling, according to http://www.bankrate.com
I don't know about you, but "Pam" at "Galactic Lending Associates" sends me several emails a week telling me that I have "already been approved for up to $400,000!" if I transfer my mortgage to her company.
Pay off that house instead by replying to those Nigerian e-mails offering you millions in exchange for access to your bank account information. :-)
Kokojmudd -- Coast2Coast has millions of listeners. I do not put any faith in what psychics claim. But the program does influence millions of people who share their opinions with others.
Both of you people ought to read the entire editorial. The writer has many uncomplimentary things to says about realtors and mortgage brokers.
It'll-be-fun-to-watch-folks-eat-crow-when-it-bursts ping to self.
You said it. I didn't. What goes up must come down. Source
Why the extreme prejudice toward two of America's great legitimate industries that help multi-millions each and every year? I'll bet you were one slammin the stock brokers because the market went down for 3 years, right???
Stick to staumpin out the evil in politics, not industry!!!
These people bought more house the they could afford. It is comming home to roost in thee next to years. Upside is that my wife and I are thinking og looking for a larger house then.
We're on our 4th Re-Fi in 20 years.
We started out on a fixed 30, went to a 15 year fixed, then a 40 year fixed, then a hybrid ARM, just rolled that for another 5 year fixed ARM, that in 5 years would increase monthly payments by half again.
By the time that happens, we'll all be speaking Spanish or Chinese anyway, the Big One will have wiped out the state, my wifey will retire and we can sell all our property and move to Mexico or Hawaii or aliens will have re-assumed control of the globe, in which case, all bets are off.
They are still building in many areas of the country, the population (including illegals) continues to grow and they don't make land anymore except in Hawaii.
I realize that doom and gloom senarios exist, but in the end, what else is new.
Eat, drink and be merry.. for tomorrow we Re-Fi. :-D
BTTT..
We are about to close on the sale of our condo, then we're moving in with my in-laws to pay off a car loan and the student loans and save money, more so because we want to relocate about 80-100 miles from here (where a $240k house there would cost $450-$600 here) and I want to continue to work here though so we want the extra money.
As much as I don't want to live with my in-laws I feel this is our best chance of breaking out of this hole that is Philly metro area.
you didn't have to be listening to Art Bell last night to know this is extremely depressing. Doomed, Doomed they say! The vibes were so intense the radio needn't have even been on ... walls echoed with the vibrations glistening off the metallic sheen of listener's tin foiled hats.
A lot of people will lose their shirts with all the creative finacnes going on lately. That and off shoring. A family that lives on my street,their house is being forclosedon. His job was shipped to China, and they arelosing it all. Got to love free trade. Not.
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