Another Housing Article
As if there wasn’t enough bad news floating around about the housing market, BusinessWeek had another article on it.
The option adjustable rate mortgage (ARM) might be the riskiest and mostIf you found this post helpful, consider donating to my coffee fund!
complicated home loan product ever created. With its temptingly low
minimum payments, the option ARM brought a whole new group of buyers into
the housing market, extending the boom longer than it could have otherwise
lasted, especially in the hottest markets. Suddenly, almost anyone could
afford a home – or so they thought. The option ARM’s low payments are only
temporary. And the less a borrower chooses to pay now, the more is tacked
onto the balance.The bill is coming due. Many of the option ARMs taken out in 2004 and
2005 are resetting at much higher payment schedules – often to the
astonishment of people who thought the low installments were fixed for at
least five years. And because home prices have leveled off, borrowers
can’t count on rising equity to bail them out. What’s more, steep
penalties prevent them from refinancing. The most diligent home buyers
asked enough questions to know that option ARMs can be fraught with risk.
But others, caught up in real estate mania, ignored or failed to
appreciate the risk.There was plenty more going on behind the scenes they didn’t know about,
either: that their broker was paid more to sell option ARMs than other
mortgages; that their lender is allowed to claim the full monthly payment
as revenue on its books even when borrowers choose to pay much less; that
the loan’s interest rates and up-front fees might not have been set by
their bank but rather by a hedge fund; and that they’ll soon be confronted
with the choice of coughing up higher payments or coughing up their home.
The option ARM is ‘like the neutron bomb,’ says George McCarthy, a housing
economist at New York’s Ford Foundation. ‘It’s going to kill all the
people but leave the houses standing.’What are we missing? We squint. We look around. We scratch our heads. And
then, we look under the cushions and behind the chairs. How can a consumer
economy keep consuming when the consumers have no more money? Or, is there
a source of revenue we have overlooked?“With soaring stock portfolios now ancient history and leaping house
prices about to be,” writes Gary Shilling, “no other sources, such as
inheritance or pension fund withdrawals, are likely to fill the gap
between robust consumer spending and weak income growth. Consumer
retrenchment and the saving spree I’ve been expecting may finally be about
to commence. And the effects on consumer behavior, especially on borrowing
and discretionary spending, will be broad and deep.”Shilling expects house prices to drop by at least 20%, which will cause a
“major recession.”
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Are 50% Discounts Becoming Common In Florida? Looks like the housing market is bad in more than just Miami. I just got this email from a real estate agent based in Florida regarding a Short Sale. We have several sellers ready to walk away from their property without a penny. We have begun negotiations with the sellers...... - CountryWide Introduces Mortgage Modification Programs A few days ago, Ben Bernanke said that mortgage lenders should reduce the principle amount on loans to home owners to prevent major defaults. While this is quite a bizzare thing to say, at some level it makes sense. Rather than foreclosure on a house and sell it for 50......
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September 6th, 2006 at 5:12 pm
My theory is that most people look only at a monthly view. “Can I afford a $20 payment for this? Can I afford an $80 for that? Oh look! This nice mort company says they can lower our monthly mortgage payment by $300 a month! Oh look, that car dealership says that new SUV is only $700 a month!!”
They don’t look at the picture bigger than month to month.
They don’t look at total cost.