 |
| 30 Yr Fix |
6.10% |
0.01% |
| 15 Yr Fix |
5.78% |
0.01% |
| 1 Yr ARM |
5.12% |
-0.04% |
| 5/1 ARM |
6.00% |
-0.02% |
| 30 Yr Tres |
4.31% |
0.15% |
| Fed Prime |
5.00% |
-0.25% |
|
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|
|
 |
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Option ARMs At The Center of Rate Shock Fears
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The concept of rate
shock is getting a lot of press and a portion of it is pretty scary. Here
is a compendium of things that are being said about potential rate adjustments
of ARMs, option mortgages, and who might bear the blame if there is what one
article termed "a neutron bomb" that would wipe out the borrowers while leaving
the houses standing. There are, of course, always individuals and companies
that will benefit from any catastrophe and those are also getting their share
of attention in the press.
BusinessWeek.com has just published a stunning article (resulting in the neutron
bomb reference above, ) that postulates that the fallout from "exotic"
mortgages - i.e. interest only and option mortgages - will reach far
beyond homeowners who took on these obligations either not understanding the
ramifications or thinking they could game the system. According to the article
Nightmare Mortgages, Wall Street, and especially hedge funds (in which
many individuals, 401(k) and traditional pension programs invest) have also
bought these loans and the risks associated with them. "The option
adjustable rate mortgage might be the riskiest and most complicated home
loan product ever created. (It) brought a whole new group of buyers into the
housing market, extending the boom longer than it could have otherwise lasted."
However, the article continues, there was more going on behind the scenes. Brokers
were paid more to sell option ARMs than other mortgages and
lenders were allowed to claim the full monthly payment as revenue even if the
borrower paid the minimum and the loan's interest rates and fees might have
been set by hedge funds rather than the banks.
The article claims that banks don't have to report on the number of these
option loans they have written but they represented "at least 12.3 percent
(of all mortgages written) during the first five months of this year."
While they have been popular on the coasts where the market is especially overheated,
"through March 31 of this year, at lest 51 percent of mortgages in West
Virginia and 26 percent in Wyoming were option ARMs."
And, not only did these exotics prolong the boom, they may well worsen the
bust. "They also betray such a lack of due diligence on the part of lenders
and borrowers that it raises questions of what other problems may be lurking.
And most of the pain will be borne by ordinary people, not the lenders, brokers,
or financiers who created the problem."
However, while the author of Nightmare Mortgages feels that "ordinary
people" will bear the pain, it is not prudent to overlook the fallout that may
affect investors and banks. If lenders are indeed booking non-existent payments
and then are hit with massive defaults with no hope of recovery
we could be looking at some devastating damage upstream. The cavalier attitude
toward commercial real estate lending in the 1980's led to massive failures
of banks and savings and loans in the 1990s. One can only hope that this left
some sort of an impression on those institutions that survived that debacle.
BusinessWeek.com also says that the option ARM is not necessarily a product
whose time has come and gone. "Despite the housing slump, option ARMs
totalling 77.1 billion were written in the second quarter this year."
The complete Business Week article is available here.
And, as BusinessWeek.com noted, in spite of the recent bad publicity attending
the "exotic" mortgages, they continue to be promoted and publicized.
Motley Fool has an interesting article this week in which the writer, Seth Jayson,
waxes furious about an ad running in a Washington, DC area newspaper placed
by a major national homebuilder. The ad offers "a variety of living arrangements
at what seem like rock-bottom prices." For example: "3-4 bedroom garage
townhomes... $1,174 per month." Or this one: "Single family and manor
homes... $1,478 per month."
However, the builder discloses, "in microscopic print, that these payments
are in fact based on teaser (interest) rates of 2.75%, a rate that disappears
after one year. After that, you're stuck with a 6.25% rate on a 40-year mortgage.
You got that right, 40 years".
Using the big builder's own on-line calculators, Mr. Jayson played with these
"teaser" offers and he says, "...forget $1,174 per month my
friend." After that first year is over and the mortgage adjusts payments go
toward $2,081 per month. That's right, 75 percent higher than the teaser payment
in the ad -- which seems to exclude insurance, taxes, and mortgage insurance.
Here is one explanatory table offered by Mr. Jayson.
| |
Teaser Rate |
Years 2-40 |
30-Year |
| Payment & Interest |
$1083 |
$1788 |
$1940 |
| Tax & Insurance |
$183 |
$183 |
$183 |
| Mortgage Insurance |
$110 |
$110 |
$110 |
| Total Monthly Payment |
$1376 |
$2081 |
$2233 |
These figures assume a $350,000 home, 10% down payment, and the builder's
auto-generated tax and insurance figures which Jayson stated he thought were
on the low side of reality. As you can see, there's an incredible difference
between ad copy and abject reality
Mr. Jayson does a good deal more number crunching in his analysis which can
be read in its entirety here.
A lot of people will only be too happy if rate shock starts shaking people
loose from their homes or causing financial upheaval. There are several websites
that make their money by dealing in foreclosures and investors who sit on the
sidelines just waiting for a disaster to happen. They are apparently doing very
well.
A bit more about this later in the week.
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Comments (7)
| Rose,
Your math doesn't work. 700 Billion divided by 50 Million equals $14,000.
Each family would get 14 grand. It would be a good boost but not enough to pay the mortgage. |
|
| Above Posted By:
Anon
| Tue, 30 Sep 2008 11:01:04 EST |
| we don't need this bail out. i can fix this problem in 20 seconds. the math is very simple.
$700,000,000,000.00 is the money to spent to bail out those theives(CEO's) the friends of politicians, who , probable get to gether in their yats and laugh at us, american idiots who voted to put bunch of thieves in control of our lives.
here is the math,.
take total population of America=302,000,000,000
take into account, half are spauses and 23rd are children, the deduction leaves us with 50,000,000,00 families, divide $700B amoungs these families, each americcan family will get enough to pay off their mortgae, their credit cards, their cars and have esxtra cash to just have one spause work and the other stay home to take care of babies, thee result....
no forclosures.. no debt, no mortgage payment, plenty of cash to spent on vacation..economy rebounds, money to spend, less jobless, plenty jobs for all...it is so simple, why don't these idiot politicion get it??? this is all game, for as long as american people sit and watch, this will continue.. the loosers, are us. the riches get richer. we got to do something. |
|
| Above Posted By:
Rose
| Sun, 28 Sep 2008 20:08:25 EST |
| Just curious to what all you people do for a living that makes you experts on an industry you dont practice in? |
|
| Above Posted By:
JB
| Wed, 23 May 2007 15:35:50 EST |
| "The mortgage industry has descended into the depths of sleaze. Too many mortgage brokers are akin to white collar criminals who lie on a pathological level to close a loan."
Wow, that's a bold statement. Do you really think they're "scumbags" or just people trying to make it in the world!! |
|
| Above Posted By:
Steve
| Mon, 21 May 2007 13:06:42 EST |
| The mortgage industry has descended into the depths of sleaze. Too many mortgage brokers are akin to white collar criminals who lie on a pathological level to close a loan. The real estate market is going to implode and the damage will resonate through the economy unlike anything since the savings and loan debacle of the 1980's. Much of the blame will go to the mortgage industry and all of the scumbags who work in it. |
|
| Above Posted By:
SC
| Wed, 27 Sep 2006 07:23:45 EST |
| I remember the late 1980's real estate shake-out caused by failed S&L's. Properties went down for over a decade in the Dallas area, (so much for r/e never depreciates). It was even worse for investors in commercial property, during that period sat hundreds of empty retail strips soaking up interest payments with no revenue. It will happen again this time around, the hard times are quickly forgotten during the boom. And home builders are already getting whacked again with inventory and land options. |
|
| Above Posted By:
Jean
| Mon, 11 Sep 2006 22:34:10 EST |
| Builders offer what seem to be "predatory" loans, often with in-house mortgage companies. They don't care what happens because the loans are sold. KB Home was fined by HUD for predatory lending, and Dominion Homes is/was being investigated. IMO the entire industry should be investigated. While I don't hold out a lot of sympathy for buyers who chose to ignore the writing on the wall, but ignorance does not excuse the fraud or borderline fraud committed by the industry. |
|
| Above Posted By:
CS
| Mon, 11 Sep 2006 14:08:49 EST |
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No surprise here. I'm a lawyer working these cases for borrowers for the last 4 years. The lenders/servicers have little to no wor...
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I am very glad to see this article I own a small real estate office and everyday I have people tell me that banks are NOT helping ...
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Well, it looks like we had two giant organizations who did essentially the same thing. Roll that in with the accounting problems o...
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