01.15.2007 - Monday Open Thread
This is your open thread for Monday, January 15, 2007. Please post random links and off-topic discussions here.
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9 comments:
Is it true that option-ARM loans are generally not sub-prime, as this New York Times article claims?
http://www.projo.com/business/content/HO_MORTGAGESUITS_01-14-07_UL3PFVD.2356864.html
If 100% interest, and option ARM, loans have not been given to sub-prime borrowers then perhaps the big bursting the real-estate bubble will take longer to play out than many of us bubble sitters had thought.
I had always just assumed that these new "exotic" loans were mostly all sub-prime (i.e. given to people with poor credit, lousy jobs, etc).
ARMS are not for the low credit rating only. lots of pepole who took out ARMS have, or had, fine credit ratings. Unfortunately, that may change once this is all over as even those people may have a hard time unless they re-finance....and upon refinancing, lenders may not think thier house has the value of what they have outstanding. No matter what their credit rating is.
that goes for interest only as well, which often are the same loan,...an adjustable, interest only.
From the comments on this thread so far, it sounds like it is true that very few sub-prime loans are of an option-ARM, 100% interest, or exotic variety.
Very interesting... That would seem to indicate that the pain from mortgage "resets" won't be all that dramatic since it would be the truly poor credit risk folks (i.e. with bad jobs, etc) who would wind up in trouble when exotic loan payments balloon.
mikhail,
Once upon a time, ARMs were tools for the financially savvy to weather periods of high interest rates. The idea was that you only purchased what you could afford, and that you would use an ARM to save some money if interest rates fell (it was still a gamble, but so long as you didn't over-extend, it wasn't a huge gamble). Payment-option ARMS, as the article notes, were "stockbroker" loans: they were for people who knew that their incomes were going to dramatically increase in the near-term (e.g. the Goldman-Sachs year-end bonus culture).
Nevertheless, what these loans were originally used for is totally different than how they're being used today. Interest rates are at an all-time low, and rising. Option-ARMs should only appeal to a tiny percentage of buyers at any interest rate. The fact that these loans are so prevalent today is sufficient to prove that they're being misused -- there simply wouldn't be much demand for ARMs right now, if they weren't being used to put people into houses they couldn't afford under conventional terms.
Let's also keep in mind that subprime lenders are imploding right now. Eliminating the subprime market is probably what's causing the bulk of this first round of foreclosures.
I was noodling around with something else recently, which might explain the high number of refis lately:
If Joe takes out a 100% I/O loan on a $400k house in 2004, and in 2005, his home is "valued" at $500k, can he refi that 100% I/O into a 80% 30 year fixed (since the 100k appreciation gain would count as 20% equity now)? If so, does the bank assess the value of the house?
If this is how people can afford to refinance, what happens to everyone who does not yet have enough appreciation "equity" to refi? Going by averages, those who bought in 2004 aren't quite to 20% yet. Add in anyone who is HELOCed to the gills, and you have a lot of people in trouble soon with no exit strategy.
That was kinda my point Mr. Bubble. Thanks for explaning better than I. There are a lot of people who saw an interest only option when they wanted to take equity out of their home's increase in value, and though they have good credit ratings, wanted to save some bucks on monthly payments, took out some extra money to spend on that bright shiny new car, and now their house has dropped in value, right when they are planning to re-fi to lock in low. Oops, banks lending up and above 50% of the value of the home, no longer think your house is worth 700K and that 400K you have in a mortgage will not allow you to re-fi. payments are going up, can't quite get there on your $65,000.00/year, over extended and forclosure. You don't need to lose your job to lose your house. All you have to do is do what a lot of americans are doing....buying a house that they can't afford, but are able to do so through I/O or ARM and not be able to keep up, or take out equity in the big rise via the same methods, same result.
I almost lost my home taking out an equity LOC on an I/O ARM to pay for my daughters college and sold it just in time....Whew! What started off as 4% and $1,500.00/mo payments rapidly went to 6.3% and 3,000.00/month payments. Got the college paid off and the house sold. I was lucky, many aren't.
My 2 cents...
not all ARMS are subprime... and not all option arms are paid using the 1st option... brokers make more if the option rider is added and they may have convinces some borrowers to add that into the loan...
I have a 7/1 ARM and excellent credit... I also bought well below my means and the home value is less then 2x our gross annual income... but I think I'm an exception in the sea of ARMS... but bottom line is you can't use the ARM statistics and conclude it's all subprime...
why did I not get a 30yr fixed? I'll probably pay off the house or move before this loan resets ... or at worst owe less than half on it.. and I got a special loan from BoA that waived PMI for my 100% loan...
Here is a comment from a San Diego Buyer in their paper this morning....“I was a naive buyer, I'll admit, but no one should have put me in this loan,”
I wonder how often we will hear that wringing out in the coming year. He lost his condo.
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