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"
The $678 payment doesn't even cover all the interest, Bangasser acknowledged.
"Well, Mr. & Mrs. Doe, you don't actually have any equity."
So clarify this for me:
Property value has increased at double digit rates for 2 to 3 yrs
Little or negative equity built up
Refinance based on new appraisal of house at current market value
Ship of fools sailing towards the horizon. Yes?
I wonder how many chose the minimal payment because they anticipated the hyper growth in housing cost. I'm guessing the same folk that have problems with all of their spending; cars, credit cards, etc.
Please add me to your ping list.
"Those of us on the sideline get in."
Amen to that.
Dear finnman69,
"Markets reversed
"Cities where prices fell or stagnated in the third quarter of 2005"
"Washington +1.3%"
Although we have more than made up for it in the first and second quarters of recent years, prices stagnate in the third and fourth quarters of the Washington region most years. I recently saw a chart in the Washington Times that showed month-by-month home price appreciation/depreciation across the region over the last five years or so. In every single year, all home appreciation came between February and June. Prices generally don't rise in the third quarter, and the fourth quarter is even worse, as in most years, prices actually DIPPED between October and January.
A 1.3% increase in the third quarter in the Washington region is not an indication of a cooling off of real estate prices (although other evidence points to moderating housing prices in the region).
sitetest
It is the adjustable part that kills these borrowers. We have a thirty year on an investment that is interest only for ten years then standard interest plus principle for the remainder. The rate stays fixed throughout and we will have the principal paid down by 75-80% by payment 121. That will leave us with 6.125 on only 20% of the original debt with the property generating 350% of the payment.
I am. I'm 32 and still single so if I'm not married and moved out/sold by age 37 then I'm selling it anyway and going to do one of those around the world trips that takes months.
I remember the 1970s.
---
I remember parts of the 70s, vaguely. ;-)
Our saving grace is sufficient enough equity and holdings to withstand a pretty good market correction.
Regardless, we are on a 5 year plan here whether my wife agrees or not, she retires officially in '08 which gives us 2 years to unload and load up and move on.
At that point or earlier, California can kiss our collective patooties as it appears to be headed downhill faster than ever before.
http://money.cnn.com/pf/features/lists/re_growth_forecast/
The markets in question. the ones at the bottom are already retreating.
| Rank | Metro Area | State | Median home price |
Projected growth 2006 |
Projected growth 2007 |
| 1 | San Antonio | TX | $129,900 | 8.30% | 7.00% |
| 2 | Jacksonville | FL | $164,700 | 8.10% | 2.50% |
| 3 | El Paso | TX | $107,100 | 8.10% | 7.10% |
| 4 | Little Rock-North Little Rock | AR | $115,700 | 7.80% | 7.20% |
| 5 | Baton Rouge | LA | $133,800 | 7.60% | 3.80% |
| 6 | Richmond | VA | $191,800 | 7.40% | 3.30% |
| 7 | Virginia Beach-Norfolk-Newport News | VA | $193,100 | 7.30% | 1.00% |
| 8 | Nashville-Davidson-Newport News | TN | $157,300 | 7.10% | 6.70% |
| 9 | Houston-Sugar Land-Baytown | TX | $139,800 | 7.00% | 6.60% |
| 10 | Memphis | TN | $147,600 | 7.00% | 6.50% |
| 11 | Allentown-Bethlehem-Easton | PA | $247,400 | 6.90% | 1.20% |
| 12 | Oklahoma City | OK | $116,900 | 6.90% | 6.00% |
| 13 | Birmingham-Hoover | AL | $152,500 | 6.90% | 5.40% |
| 14 | Albuquerque | NM | $166,700 | 6.50% | 6.10% |
| 15 | Columbia | SC | $133,200 | 6.40% | 5.40% |
| 16 | Fort Worth-Arlington | TX | $125,700 | 6.30% | 5.00% |
| 17 | Syracuse | NY | $109,400 | 6.20% | 5.40% |
| 18 | Dayton | OH | $116,500 | 6.10% | 5.60% |
| 19 | McAllen-Edinburg-Mission | TX | $71,000 | 6.10% | 6.20% |
| 20 | Salt Lake City | UT | $165,700 | 6.10% | 3.40% |
| 21 | Austin-Round Rock | TX | $161,800 | 6.10% | 5.00% |
| 22 | Tulsa | OK | $116,600 | 6.10% | 6.20% |
| 23 | Pittsburgh | PA | $113,000 | 6.00% | 5.00% |
| 24 | Cincinnati-Middletown | OH | $146,200 | 6.00% | 6.60% |
| 25 | Albany-Schenectady-Troy | NY | $176,700 | 6.00% | 4.50% |
| 26 | Dallas-Plano-Irving | TX | $155,500 | 5.90% | 6.30% |
| 27 | St. Louis | MO | $134,900 | 5.80% | 4.10% |
| 28 | Toledo | OH | $116,400 | 5.70% | 5.00% |
| 29 | Greenville | SC | $141,300 | 5.70% | 5.00% |
| 30 | Sarasota-Bradenton-Venice | FL | $314,300 | 5.60% | -3.60% |
| 31 | Indianapolis | IN | $121,700 | 5.60% | 5.40% |
| 32 | Wichita | KS | $107,200 | 5.50% | 4.80% |
| 33 | Columbus | OH | $150,700 | 5.50% | 6.00% |
| 34 | Akron | OH | $117,600 | 5.40% | 5.30% |
| 35 | Buffalo-Niagara Falls | NY | $96,400 | 5.40% | 5.30% |
| 36 | Knoxville | TN | $140,100 | 5.40% | 5.20% |
| 37 | New Orleans-Metairie-Kenner | LA | $149,100 | 5.40% | 6.60% |
| 38 | Rochester | NY | $111,200 | 5.30% | 6.80% |
| 39 | Raleigh-Cary | NC | $183,100 | 5.20% | 5.10% |
| 40 | Philadelphia | PA | $199,400 | 5.10% | 0.50% |
| 41 | Charlotte-Gastonia-Concord | NC | $172,800 | 5.10% | 5.50% |
| 42 | Louisville | KY | $134,800 | 5.00% | 4.60% |
| 43 | Milwaukee-Waukesha-West Allis | WI | $210,900 | 4.80% | 2.50% |
| 44 | Tampa-St. Petersburg-Clearwater | FL | $193,700 | 4.80% | -0.50% |
| 45 | Greensboro-High Point | NC | $145,100 | 4.80% | 5.50% |
| 46 | Kansas City | MO/KS | $154,600 | 4.70% | 4.10% |
| 47 | Poughkeepsie-Newburgh-Middletown | NY | $265,000 | 4.60% | 0.80% |
| 48 | Youngstown-Warren-Boardman | OH | $83,400 | 4.50% | 5.30% |
| 49 | Gary | IN | $127,300 | 4.40% | 3.40% |
| 50 | Cleveland-Elyria-Mentor | OH | $142,800 | 4.30% | 5.10% |
| 51 | Omaha-Council Bluffs | NE | $136,100 | 4.30% | 4.10% |
| 52 | Lake County, Kenosha County | IL/WI | $259,100 | 4.20% | 1.90% |
| 53 | Atlanta-Sandy Springs-Marietta | GA | $165,300 | 4.20% | 4.00% |
| 54 | Honolulu | HI | $570,400 | 4.00% | -1.00% |
| 55 | Orlando-Kissimmee | FL | $226,400 | 3.80% | -0.50% |
| 56 | Grand Rapids | MI | $137,300 | 3.60% | 2.90% |
| 57 | Fort Lauderdale-Pompano Beach-Deerfield Beach | FL | $356,600 | 3.10% | -4.50% |
| 58 | Springfield | MA | $197,900 | 3.00% | 1.20% |
| 59 | Portland-Beaverton-Vancouver | OR/WA | $234,600 | 3.00% | -0.70% |
| 60 | Baltimore-Towson | MD | $249,100 | 2.90% | -0.80% |
| 61 | Tucson | AZ | $220,900 | 2.90% | -4.00% |
| 62 | Camden | NJ | $210,800 | 2.70% | 0.80% |
| 63 | Denver-Aurora | CO | $244,800 | 2.60% | 2.50% |
| 64 | Wilmington | DE | $231,000 | 2.50% | 1.70% |
| 65 | Seattle-Bellevue-Everett | WA | $335,500 | 2.50% | 1.00% |
| 66 | Tacoma | WA | $222,700 | 2.30% | 0.60% |
| 67 | W. Palm Beach-Boca Raton-Boynton Beach | FL | $386,200 | 2.10% | -3.90% |
| 68 | Phoenix-Mesa-Scottsdale | AZ | $238,100 | 2.00% | -3.70% |
| 69 | Warren-Farmington Hills-Troy | MI | $196,000 | 1.90% | 0.80% |
| 70 | Washington-Arlington-Alexandria | DC/VA | $404,900 | 1.80% | -3.40% |
| 71 | Hartford-West Hartford-East Hartford | CT | $257,600 | 1.80% | 0.60% |
| 72 | Miami-Miami Beach-Kendall | FL | $343,700 | 1.80% | -5.50% |
| 73 | Detroit-Livonia-Dearborn | MI | $120,100 | 1.60% | 2.00% |
| 74 | Newark-Union | NJ | $407,000 | 1.50% | -1.80% |
| 75 | New Haven-Milford | CT | $280,300 | 1.40% | 0.60% |
| 76 | Worcester | MA | $287,800 | 1.30% | -0.30% |
| 77 | Edison | NJ | $387,900 | 1.20% | -2.90% |
| 78 | Chicago-Naperville-Joliet | IL | $264,900 | 1.10% | 0.20% |
| 79 | Cambridge-Newton-Framingham | MA | $448,800 | 0.80% | 0.00% |
| 80 | Minneapolis-St. Paul-Bloomington | MN | $234,600 | 0.70% | 0.70% |
| 81 | Bridgeport-Stamford-Norwalk | CT | $472,500 | 0.40% | -1.30% |
| 82 | New York City-White Plains-Wayne | NY/NJ | $504,800 | 0.10% | -3.50% |
| 83 | San Francisco-San Mateo-Redwood City | CA | $766,000 | 0.10% | -2.90% |
| 84 | Bethesda-Gaithersburg-Frederick | MD | $444,500 | 0.00% | -0.50% |
| 85 | Boston-Quincy | MA | $422,900 | -0.10% | -1.40% |
| 86 | Essex County | MA | $380,600 | -0.20% | -0.70% |
| 87 | Stockton | CA | $423,100 | -0.30% | -5.90% |
| 88 | San Jose-Sunnyvale-Santa Clara | CA | $720,900 | -0.40% | -3.90% |
| 89 | Oxnard-Thousand Oaks-Ventura | CA | $480,300 | -0.70% | -5.00% |
| 90 | Oakland-Fremont-Hayward | CA | $651,300 | -0.70% | -4.40% |
| 91 | Fresno | CA | $340,800 | -0.80% | -2.80% |
| 92 | Bakersfield | CA | $286,300 | -0.80% | -3.00% |
| 93 | Providence-Fall River-New Bedford | RI/MA | $292,800 | -1.10% | -2.20% |
| 94 | Sacramento-Arden-Arcade-Roseville | CA | $372,900 | -1.20% | -5.10% |
| 95 | Los Angeles-Long Beach-Glendale | CA | $412,900 | -1.60% | -6.30% |
| 96 | Nassau-Suffolk counties | NY | $461,300 | -2.00% | -4.20% |
| 97 | Riverside-San Bernardino-Ontario | CA | $362,800 | -2.60% | -6.80% |
| 98 | Santa Ana-Anaheim-Irvine | CA | $682,300 | -3.10% | -6.10% |
| 99 | San Diego-Carlsbad-San Marcos | CA | $598,700 | -3.40% | -5.70% |
| 100 | Las Vegas-Paradise | NV | $296,000 | -7.90% | -5.00% |
|
|
Valuation of the house. If the housing bubble bursts, he might want a $250,000 loan on a house the appraiser says is only worth $200,000.
But real estate investing is so 2005. I'm putting my money in investment grade tulips.
Right....I was warned against the dangers of an ARM when I purchased a house back in the 80's. I have refinanced 4 times since then and still have an ARM and at better rates than before. Maybe next year I will get worried.
I really think that this isn't going to cause a huge problem. Most of the people dumb enough to stretch their finances to the insane lengths that the Barron-Wood couple has, are in relatively small, inexpensive homes. On top of that, most of the homes have appreciated in value signficantly since they were purchased.
Sure, some of that value will evaporate as a lot of these homes start coming onto the market, but for the lenders to get burned, the sale prices will have to go below what they were when they were purchased, which just isn't going to happen very often. The stupid home"owners" will be the ones getting burned, when the effectively 100% mortgaged homes do in fact sell for exactly what they were purchased for. Then the stupid former home"owners" will discover that they have actually been paying very high rent through these years, and have no equity whatsoever. When they hit a financial snag and lose their homes to payment defaults, the lenders will be made whole and the just-found-out-we-were-renters folks will go off and rent an inexpensive apartment.
There will be serious bubble-bursts in a handful of markets, but not nationwide.
NYC is one of the markets which is likely to see a significant downward adjustment in prices. But the impact won't be as harsh as in other bubble markets, because a lot of these properties are coops, whose boards don't allow dangerous financings and who don't accept buyers whose overall finances aren't strong.
Dear finnman69,
"projected to drop in 2007 in DC..."
LOL. 2006 has barely begun, you're citing bullish statistics on the last half of 2005, and already someone's predicting a 3.4% decrease of prices in the Washington, DC region for 2007! I guess someone really shined up their crystal ball!
I wonder what assumptions are built in to those predictions. Perhaps higher mortgage rates? What if rates stay steady, or even decline a little? Perhaps increased new housing starts? The trend here is in the opposite direction, as the boom (ironically) cleared out a lot of little builders, and mostly the bigger boys are in charge, and these guys know how to manage inventory.
I'm not sure anyone can predict with any degree of accuracy what will happen two years from now, but heck, a 3.4% decline? It may happen. The region has endured far worse years in the last 30. After the run-up of the last five years or so, if prices decline by less than three and a half percent in 2007, I'm not sure most folks will really notice. That's more of a breather than a bubble burst.
As well, it's likely that declines will be limited to those areas that got to be the most outrageous (our own intra-regional "mini-bubbles"). There may be neighborhoods where prices actually do decline 10% or more. Heck, at the height of the market, in these places, folks were buying property virtually site-unseen, with auto-escalator clauses, waiving inspection and financing contingencies.
But although those neighborhoods got all the headlines, the overwhelmingly vast majority of neighborhoods were more like mine, where prices advanced strongly, houses often sold in 30 days, and sometimes even in 3 days, and a few houses got multiple bids and eventually fetched more than the original asking price. But folks still got inspections, still usually had financing contingencies, and usually didn't have wild escalator clauses.
In any event, my original point stands - a 1.3% INCREASE in the third quarter in housing prices in the Washington, DC region is not evidence of a cooling market (even though the market is clearly cooling).
sitetest
Wow! Hold tight buddy, hold tight! I envy your position. Good job!
"Good job!"
I just listened to my dad when I was young. He told me that I should work towards owning the home I live in outright. So I did that. I was lucky that the CA home went up in value that much.
For the boomers out there, like myself: Before you retire, get into a home you own outright. It's the best thing you can do for your retirment.
http://patrick.net/housing/crash.html
That's not just over-confidence, it's recklessly presumptuous.
"so overconfident and impudent as to speak to the queen"
Please be my fortuneteller; I'll give you a cut of the millions we make together.
Time will tell. I just want freepers to carefully consider the pros and cons while refis are still easy to arrange.
Not really. Even if I didn't pay it off or sell it, I can absorb an interest rate hike.
My monthly mortgage is about 6% of my monthly gross income.
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