Posted on 01/04/2006 8:46:59 AM PST by Travis McGee
The HeraldTribune is reporting the clock is winding down on the Hybrid Loan and Sub-Prime mortgage time bombs.
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. 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.
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 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.
"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."
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. "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."
At Sarasota's Integrity Mortgage Group, ARMs have far and away taken over as the most popular. Five years ago, there was only an occasional one-year or five-year ARM. "Out of 200 loans you'd do 10 adjustables," Integrity President Jason Thurber said. "In the last year, I've probably done five fixed-rate loans, 30- or 15-year, out of 150 loans. So all the rest are some kind of hybrid."
The big picture looks similar, says SMR Research of Hackettstown, N.J., which regularly surveys lenders who make 90 percent of America's home loans.
"I can say that the first half of this year, ARM share was 55 percent nationally," said SMR's George Yacik. "For the full year 2004, it was 50 percent." Making matters worse, it is the the sub-prime lenders issuing the most adjustable-rate mortgages. With those who participate in the survey, 80 percent of their loans were ARMs compared to 55 percent in the broader market.
Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be "adjusted," and when. Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.
Berson offered a typical example of what the industry calls a "2-28," an ARM in which the interest rate is fixed for the first two years and then adjusts regularly for the next 28 to whatever index the loan calls for. The average yearly cap on this loan is 2.3 percentage points per year.
Roughly speaking, a consumer's monthly bill could rise from $330 to as much as $1,425 to $1,755.
Fannie Mae expects sub-prime loans to be reset en masse this year with that trend continuing into 2007.
But over at the Mortgage Bankers Association, senior economist Michael Fratantoni is more interested in the five-year adjustables that were issued during the refi craze of 2002-03. That's a large crop that will sprout in 2007.
"The estimate is that in 2007, more than a trillion dollars worth of hybrids are going to hit their first reset date," he said.
That one chunk of hybrid loans represents 12 percent of the $8.8 trillion in single-family home loans outstanding nationwide.
Like many ARM borrowers, Barron, the Gillespie Park buyer, is not really sure how much his payment will go up when the loans are reset. The new rate is a moving target. "Come year four, they adjust it based on the prime rate," he said. "It is like prime rate plus two, or, I can't remember exactly what the adjustment is."
At Washington Mutual's Bee Ridge Road office in Sarasota, 25 percent of current applications are for option ARMs, says senior loan consultant Mike Bangasser.
For customers with good credit, there is only about a half-percentage point difference between the 5.75 percent rate on an option ARM and the 6.375 percent rate on a 30-year fixed rate mortgage.
So why bother with the ARM?
This is the key: The minimum payment today on a $200,000 option ARM would be only $678, a little more than half the cost on a 30-year, fixed-rate loan. On that $200,000 loan, a 30-year fixed would be $1,248 per month in principal and interest. With the option ARM, there are three other payment choices: $958, $1,167 or $1,661.
The $678 payment doesn't even cover all the interest, Bangasser acknowledged.
He guesstimated that if somebody borrowed $250,000 on a typical option ARM and made minimal payments for five years they would be "going to be in the hole 15 percent to 20 percent of your original balance, meaning $285,000 to $300,000."
"You don't have to have negative am," Grande said. "As long as you make that fully-indexed payment, you're fine. But most folks aren't doing that. They take the easy way out, get themselves in trouble."
There is one more ingredient to add to this layer cake, and it is one that barely occurs to most borrowers today: What if someday, loans were difficult to get?
"Consumers have become so accustomed to very liquid mortgage markets, where credit is available for almost any circumstance, that they are not aware this is unusual in the market," HSH's Gumbinger warned. "Somewhat tighter credit availability and somewhat higher interest rates are much more normal."
"Borrowers think they can always refinance. That is not always a safe bet."
It's hard to know where to start with this kind of nonsense. But people still insist there is no bubble. That this type of activity occurs routinely is clear evidence of a credit lending bubble. Given that the credit lending bubble has grossly affected home prices, it should be obvious there is a housing bubble as well. Day in and day out however, someone writes an article telling us why this time is different and how affordable housing really is.
We have been talking about a possible "credit event" when these loans reset, so I guess we do not have much longer to see. It may not be a "big bang" however, as these loans are scattered throughout 2006 and 2007.
It is amazing to me that people in these loans are nearly clueless as to what their loans might get reset to. Barron's loan adjusts to prime rate +2 or something like that but he "can't remember exactly what the adjustment is." Yikes that is 9.25%, on three properties! He has three 100% loans based solely on "shining credit" and someone stupid enough to make the loan. Perhaps a better way of stating it is some hedge fund or mortgage player or investor is stupid enough to take that risk for perhaps an extra 1/4 point or 1/2 point over treasuries. Is that a good deal? I think not and I fully expect to see some hedge funds and/or leveraged reits to blow up over it too.
January 1, 2006 Mike Shedlock "Mish"
"and in year 5, if I want to I can refi.
"
Maybe you can. Maybe you can't. If a lot of folks ahead of you end up defaulting, there may be no money to refi and lenders aren't going to be so eager to refi for you. And...if they do offer you a refi, it may cost you a prohibitive amount in interest and points.
Don't be too confident. Watch the market, and get out if necessary, well ahead of the conversion date.
What happens to RE values when millions of Americans reach that identical conclusion, and they are carrying a $250,000 morgage with zero equity, and they find out to their misery that their house is now worth only $200,000, or less?
They can't make the adjusted monthly payment. They can't come up with the $50,000 to sell the house at the new value. They can't refi into a suddenly tight loan market.
What happens next? Personal bankruptcy.
What happens nationally, when this happens to millions of Americans?
If all these folks default (which I doubt) then alot of banks are going to own homes. Do banks want to own homes????
Sounds like a good buying opportunity.
You HOPE.
http://www.nypost.com/news/regionalnews/60941.htm
we are at the plateau and heading down in some major markets including Vegas, Phoenix and NYC.
APTS. IN FAST FALL
By BRADEN KEIL
Want to buy an apartment? There's plenty available.
Sales of Manhattan apartments have dropped more than 20 percent, according to fourth-quarter reports compiled by four of the city's largest real-estate firms, while inventories of properties for sale have jumped.
"We've seen a significant drop in residential sales in the last quarter," said Jonathan Miller, of Miller Samuel appraisers, who produced the Prudential Douglas Elliman report.
"It's further evidence of a shift of gears in the market."
While fourth-quarter sales quotas have traditionally been lower than third-quarter numbers — with an average decline of 6.7 percent — Miller's 21 percent drop represents an eye-popping number.
His findings are also mirrored in a 23 percent decline by Realtor Brown Harris Stevens.
The overall sales price numbers have remained mostly flat from a disappointing third quarter. The average price of co-op apartments has dipped below the $1 million mark for the first time this year, and the price of a condo in the Big Apple has dropped a mere 0.6 percent, from $1.391 million in the third quarter to $1.382 million for the fourth quarter.
The bad news for what was a steamrolling market began in the third quarter, when the average price of a Manhattan apartment — including co-ops and condos — dropped 12.7 percent, from a record high of $1.32 million in the second quarter to $1.15 million.
Meanwhile, the two-bedroom apartment market, long considered the staple of a bullish market, dipped 3.4 percent to $1.49 million from $1.54 million. Miller attributes the nervousness in the market to unfavorable market news that includes hurricanes, nonstop talk of a real-estate bubble and interest rates rising.
In the Brown Harris Stevens report, the average sales price for a Manhattan co-op apartment dropped nearly 12 percent from $1.044 million in the third quarter to $921,791 in the fourth quarter.
But company chief economist Greg Heym blames the downswing, in part, on lesser-priced apartments that are still moving.
"Our numbers show that studios and one-bedroom apartments are what's accounting for 64 percent of the co-op sales," he said.
Brokers still show signs of optimism.
"It could get dangerous, but it can be managed," said Prudential Douglas Elliman broker Dolly Lenz.
And not all the news is bad — the Manhattan residential real-estate market is still up 4 percent from a year ago, said one expert.
"The real-estate market in both Manhattan and Brooklyn remains strong, with growth continuing to return to more historical levels," said Brown Harris Stevens President Hall F. Willkie.
"While the overall rate has moderated in the residential market, some sectors continue to appreciate sharply. As demand for smaller units has increased, the prices for these units have escalated greatly," added Heym.
On a per-square-foot basis, the average sale price was also up over the past year, from $780 the last quarter of 2004 to $1,002 this year.
Losing Las Vegas
Last week we reported on George Clooney's and Ivana Trump's troubled Las Vegas condo projects. And now it looks like those developments were just the tip of the iffy iceberg.
According to the detailed market report released on PR Web on Thursday, several developments in Sin City have either crapped out or are in jeopardy. Earlier this year, Michael Jordan's multi-complex condo building Aqua Blue fouled out.
One developer throwing in the towel is Victor Altomare, who announced he was shuttering operations on his planned Liberty Towers high-rise condo, even though it was 85 percent sold. The report says buyers who have already put deposits down on failed projects are "angry that they have lost huge potential profits waiting on projects that were well-advertised but under-funded."
Meanwhile, a staggering 23 projects, comprising more than 20,000 units, are close to completion. Another 11 planned places (including George Clooney's) are on respirators, and another six are already dead.
Why do we care so much about Vegas? Experts say that it could become the first major city to experience a true real-estate bubble burst, which, in turn, could fuel a panic across the nation.
If that's the case, we hope what happens in Vegas stays in Vegas.
Those of us on the sideline get in.
What would prevent him from refinancing? Nothing, if he has the equity (millions have ZERO equity) to cover new tough down payment requirements, say 20%, and can qualify for a much higher monthly under much tougher qualification terms.
The days of anybody with a pulse getting a 100% loan, no down payment, no credit check, no minimum income requirements etc will be over. In fact, they will seem like a dream. Millions of Americans who stretched and fudged to get into a 100%, interest-only ARM loan (on the assumption the house would increase in value 10-20% per year) may be shocked to wake up in an entirely different lending climate. I remember the 1970s.
The average mortgage lasts 7 years or less. So for the average homeowner a 30 year mortgage provides the opportunity to pay the mortgage company more interest for a product that will not be used.
Yup. The last in at the top of the bubble will be the worst hurt. The ones who wait will get some deals.
"If all these folks default (which I doubt) then alot of banks are going to own homes. Do banks want to own homes????
Sounds like a good buying opportunity."
You sound pretty confident about the payoff or relocation. I hope you turn out to be right. Occasionally life becomes non-linear and plans go awry. I found that out myself.
Currently, in an historically easy lending period when banks are fighting to shovel money to anybody who can sign a paper.
What about the interest only loans that are advocated by folks like Dave Ramsey in an effort to pay off debt?
"Millions of Americans who stretched and fudged to get into a 100%, interest-only ARM loan (on the assumption the house would increase in value 10-20% per year) may be shocked to wake up in an entirely different lending climate. I remember the 1970s."
The level of denial is amazing, isn't it? My biggest worry is that we no longer have the national character that saw us through the Great Depression - many of today's Americans will not hesitate to resort to criminal behavior to maintain their lifestyles.
Mortgage Banker PING, Louie
many of today's Americans will not hesitate to resort to criminal behavior to maintain their lifestyles.
Fun with Dick and Jane. :)
Yes, they're "renting" but with the bonus (to the true owners) that the "renters" will take care of the property like home owners. And the ARM holders might own the property someday... Smart/lucky folks who use the system to pay down principle (in time) will win - those with impulse problems will lose. It's a new trap for the "I want more than I can afford" folks. And an elegant trap at that...
I was going to start looking seriously this summer. By then I think there will be many more options for buyers across the US.
Another article about a slowdown, again in NYC which I think is better insulated against a housing bubble than many places:
http://money.cnn.com/2006/01/04/real_estate/manhattan_prices_hit_wall/index.htm
Manhattan real estate hits wall
Big Apple prices are treading water after years of big gains. Will the rest of the nation follow?
By Les Christie, CNNMoney.com staff writer
January 4, 2006: 9:55 AM EST
NEW YORK (CNNMoney.com) - Manhattan real estate may have hit a wall -- albeit a very high one. The last half of 2005 saw home prices lag, according to two new reports from Manhattan brokers.
According to Prudential Douglas Elliman, the median sale price for co-ops and condos in Manhattan rose just 1.3 percent in the fourth quarter of 2005, to $760,000. The Corcoran Group found that median sales price declined during the quarter, with a 4 percent slide.
Markets reversed
Cities where prices fell or stagnated in the third quarter of 2005
City % Change
Boston -2.0%
San Diego -1.5%
San Francisco -1.2%
Chicago -1.1%
Nassau/Suffolk Cos. -0.7%
New York -0.5%
Los Angeles +1.2%
Washington +1.3%
Source: National City Corp
Because Manhattan sales had soared during the first half of the year, however, gains for the full year were still hefty at more than 20 percent. In addition, both brokers noted an uptick in the market at the end of the year.
A two-bedroom apartment now costs a median average of about $1.2 million in Manhattan, according to Corcoran.
The Manhattan slowdown comes on the heels of similar drops in the third quarter in some of the nation's most expensive real estate markets. Boston and other Bay State areas, many California markets, the Washington D.C. area, and suburban New York counties, all recorded lower or flattening prices, according to National City, a financial holding company.
Late year rebound
According to Pamela Liebman, Corcoran's CEO, the Manhattan market began to soften in the third quarter, owing in part to rising energy costs and media reports of the real estate bubble.
Locally, a lot of new inventory came on the market. Some 5,764 residences were in the listing inventory, a huge 52 percent increase over the past year.
"Buyers got tired of paying more and more and took a breather," said Liebman.
But things began to turn a bit in the last six weeks of the year.
Much of that improvement came courtesy of Wall Street, according to Jonathan Miller, a real-estate appraiser and consultant who compiled data for the Elliman report. He said bonuses in the financial industry set a record this year.
"Wall Street accounts for only about 6 percent of the jobs in New York but 25 percent of the economic activity," said Miller. "Every time there's an up-tick in bonuses, there's an up-tick in the real estate market."
Elliman's CEO, Dottie Herman, said she doesn't expect the Manhattan market to return to double-digit appreciation. That will "weed out the segment of the market that likes to flip, buy properties and sell them six months later for millions of dollars."
Herman does predict modest price increases of five or six percent during the coming year.
As for the increase in inventories, Miller said the increase is in line with the historical average.
Liebman expects the luxury market to continue to cook this year, but the non-luxury market is in more iffy. "There's still a lot of demand but there's not a total willingness to pay any price – except for trophy properties," she says.
Taking the broad view
"We can't extrapolate national trends from Manhattan markets," says Richard DeKaser, chief economist for National City Corp. But the turn in Gotham prices does mirror what has happened in many other pricey regions.
It's evidence of what DeKaser calls "the turning of the housing market."
The average Boston sale price declined 2 percent in the third quarter of 2005, according to data from National City's Housing Valuation Analysis. San Francisco real estate fell about 1.2 percent and San Diego 1.5 percent. Washington D.C. rose, but only by about 1.3 percent and Los Angeles went up 1.2 percent during the quarter. Prices in northern New Jersey and in Nassau/Suffolk Counties in New York also fell.
DeKaser expects price increases nationwide to continue to slow. "Demand and market price appreciation peaked sometime this summer. What we're seeing now is an orderly retreat," he says.
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