Posted on 08/06/2006 8:59:22 AM PDT by ex-Texan
BOSTON (MarketWatch) -- It is becoming increasingly obvious that financial advisers, real estate experts and parents will someday point to what is happening in the mortgage market today and use it as a cautionary tale of what can go wrong when a buyer stretches to get too much house during a market that seems invincible.
Real estate has been booming in most markets over the last five years or longer, fueled by interest rates that reached four-decade lows and by consumers who used new mortgage products to extend their buying power. Many home buyers stopped worrying about buying a home and instead worried about their ability to pay for one; rather than shopping for a deal that allowed for a lifetime purchase, they looked for a mortgage that allowed them to buy the most home for the lowest current payment.
So long as rates stayed low and housing prices continued to move up strongly, that strategy was a good one. And those things kept happening, so that homebuyers ignored the warnings issued by many mortgage experts about what would happen when times changed.
Well, times have changed.
The popularity of adjustable-rate mortgages means that nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years, according to Economy.com, a Web site run by Moody's Corp. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007.
Those moves won't be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too. The current forecasts from a number of experts have defaults on those loans increasing by 10%.
"There is no apples-to-apples comparison from the kind of mortgage someone could get a year ago and what they can get today," said Anthony Hsieh, president of LendingTree.com. "As rates rise on adjustables, there are steps people can take to reduce the sticker shock, but they're probably not going to be too happy with what they have to swallow now. ... They had a 42-year low in mortgage rates, but they were more concerned with how much they would have to pay each month than how much they could afford and buy a home reasonably."
Plenty of bad news
For someone who purchased a home using an ARM -- or taking advantage of some of the attractive teaser rates that were available over the last few years -- there is plenty of bad news if they need to refinance now. Obviously, that starts with current interest rates. Moving to a 30-year fixed-rate mortgage now means looking at rates north of 6.5%, and the longer a consumer waits, the bloodier that transition is likely to be.
But if the house was purchased recently -- and with the ARM keeping payments low -- there hasn't been much equity build-up; if the home is in a market that is now cooling down, the owner's equity is further impaired.
"People were gambling that their income would get to a point where it was high enough to pay for the home at some point," says Greg McBride, senior editor at Bankrate.com. "They also were gambling that the market would help them build enough equity that they could refinance if they needed to. Now they may need to, and those gambles aren't paying off."
Some of those consumers will become default statistics. Others will have to downsize, or change neighborhoods, in order to get a mortgage that is more affordable.
There's a problem with that "smaller house" strategy too, at least in markets where prices are on the decline. A homeowner who put little down and who built little equity -- and who lives in a market where prices are on the decline -- may find that a small step back is not sufficient to actually cut mortgage payments.
How bad is it?
McBride suggests that consumers who are facing adjustable-rate sticker shock should try to determine now just how bad the movement might be. From there, they can decide if it's time to make a change so that they don't get slammed.
Many adjustable-rate mortgages include annual and lifetime caps on the interest rate that can be charged, so homeowners may not see the full impact of sharply higher rates immediately. A 2-percentage-point annual cap is fairly common.
To see how bad an adjustment hit might be, consumers should look at their mortgage paperwork to see when the reset occurs, the rate that the mortgage is tied to and then the margin that is used for the adjustment.
The Libor rate, for example, has moved from roughly 4.2% a year ago to about 5.6% today. A mortgage that is pegged to Libor plus two percentage points, therefore, will adjust up to about 7.6%.
A homeowner looking at that kind of rate could refinance into an average fixed-rate deal and be better off. Says McBride: "There is still time to get off the tracks before the train gets closer, but people need to act now. A 7% mortgage today beats an 8% refi a few months from now.
"People's choices are only going to get uglier, and plenty of people are on their way to trouble. ... For everyone who has avoided this trouble, they're going to look back someday -- when their kids are looking for a mortgage and are tempted to stretch too far by using an ARM -- and have stories to tell about how they saw a time when everything that could go wrong with that strategy did go wrong."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
Here's an excerpt from a So Fla article today. Homeowners are also getting slapped with skyrocketing hurricane insurance premiums. If the legislators get tough then the insurers will pull out of the state.
"State failures leave policyholders without a net"
By Kathy Bushouse
South Florida Sun-Sentinel
August 6, 2006
Florida's property insurance market is a mess, despite legislators' attempts to fix it for more than a decade.
The price of home and condominium insurance has soared to dizzying levels. Insurers have dumped longtime customers and slashed coverage for others. The state's home insurer of last resort now is the biggest property insurer in Florida.
More and more homeowners and businesses are forced to ponder whether they can afford the Sunshine State anymore.
Much of this is the Legislature's handiwork
http://www.sun-sentinel.com/news/local/southflorida/sfl-zinsurecrisis06aug06,0,7279582.story?coll=sfla-home-headlines
But, then, most people would understand what Iran's and al Qaeda's real motive is aimed at today: To raise asset prices and commodities to outrageous levels by means of terrorism and reduce the value of the USD. If you are aware of what is really happening today, then you may have made hundreds of thousands in currency trading.
"But, then, most people would understand what Iran's and al Qaeda's real motive is aimed at today: To raise asset prices and commodities to outrageous levels by means of terrorism and reduce the value of the USD. If you are aware of what is really happening today, then you may have made hundreds of thousands in currency trading."
I think al Qaeda is more ideologically driven. However, Iran, Russia, China, Venezuela and others are in it to manipulate the markets and destabilize our economy even if it requires using proxies like hezbullah to do it. As for the gol-oil link, I'm not seeing it. I'm long energy and big pharma and short discretionaries...my favorite being Whole Foods Market which to me is a liberal freak show since they refused to carry and sell live lobsters under the guise of animal cruelty.
Is that going to be nationwide? When will this happen?
Of course, they are famous naysayers on FR.
I see you haven't lost your sense of humor.
You have a link to this evidence?
In the meantime, perhaps it would be worthwhile for me to explain to *you*:
The trend is going in the direction of more foreclosures.
While that does not prove that things are going to snowball, it might be a first step, and thus bears watching.
Cheers!
Few people remember the late 1970s. At that time, I got a 10% mortgage loan only because it was a VA loan. I had friends with conventional mortgage loans that were as high as 14%. (During Jimmah Cahtah's Presidency, the prime rate went to 22%.)
That offer was more for Ex-Texan. He likes to link to articles that make the opposite point of what he intends.
The trend is going in the direction of more foreclosures.
After years of record low levels of foreclosures, I wouldn't be surprised if levels increase.
it might be a first step,
Bravo, you haven't had the ex-Tex kool-aid.
I can feel sorry for them. I was lucky enough to be able to mature in a culture that only lent to the creditworthy. I'm in good shape, but looking around at this highly-leveraged home economy, I'm scared. And I'm mad as heck at the profligate lending practices.
By the time I qualified for credit, I was at least a grownup. That was when it was hard to get a department store credit card of any kind, and you really had to be established to get a bank credit card. Today--They seduce college kids into debt--kids who are legally of age but have no income!
And every other commercial on TV is another seduction into overspending and debt--I just saw one advertising "interest only" loans.
If i'd had all this "free money" dangled in front of me when I was young and inexperienced, I wonder if I might have fallen prey.
Banks need to return to lending only to the creditworthy. They are professionals, and should be held to professional standards.
The max is 3% on homesteaded property only. Taxes are unrestricted on investment/nonhomestead. Our local redneck county commissioners publicly take delight taxing out of staters to death. What's left unsaid is that business and employment growth are abysmal.
Unfortunately for him, I don't think DailyKos links are allowed on the News forums.
RE has already gone down 20% in many parts of CA.
I'd rather have "redneck" commissioners doing the legislation than the bonehead liberals I've got sucking the blood out of my city and my pocket. As for how "out of staters" are getting fleeced, you'll have to explain that one to me. Primary residences in Fla can be homesteaded and cannot be touched by creditors. Fla is a debtor state going back to reconstruction to protect it's citizens from carpet bagging Yankees.
Reading your post more carefully, I understand where you're coming from and agree with your position. We've had so much Carribbean and third world immigration over the last 30 years that county and city politics is craven to the tax and spenders who are running things into the ground.
Did you smoke weed, drop acid and drink booze like Teddy Kennedy when you were younger? Did you have sex at the drop of a hat, rack up abortions like it was a sport, and build up an immunity to all but the worst sexually transmitted diseases because you were exposed so often to them? Did you drop out of high school because it was "easier" to not go to school? If you went to college, did you blow off most of your classes and make Animal House look like reality?
I'm just going to guess that the answer is no. But a lot of folks did when they were "at that age". Kind of like the same folks that make the stupid decision to reach for the "free" money that dangles all around them today. There is a reason some people succeed in this country while others spend a lifetime digging themselves out of holes. I admire those who succeed. And I really don't feel sorry for those who make decisions that result in their failure. We were all young and stupid once.
I like getting upset as much as the next guy, but somebody's going to have to tell me just what it is that's making the world end this week.
What we've got here are ain't-it-awful news stories coming out of California (so?) while nationwide the average homeowner has been seeing mortgage debt falling as a percentage of home value. For me to be able to say that average Americans have "overextended their credit" I'd have to either love slandering Americans or hate studying them.
Cherry picked bad news factoids may be a staple for the DBM, but for serious business decisions we need serious data plots for the nationwide trend for foreclosures --which is down, along with other forms of consumer credit delinquencies.
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