Monday, March 24th, 2008 at 2:44 PM
Somber Reminder
Though there has been an uptick in market activity, and the government believes they are doing things that might make a difference, there is one looming problem – resetting adjustable-rate mortgages.
It looks like we’re only in the second or third inning, and this chart doesn’t factor in the folks with fixed-rate loans who will walk away.
Posted on Monday, March 24th, 2008 at 2:44 PM in Uncategorized | 24 Comments » | 
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except that rates are so low that some folks will even see their ARMs resetting DOWNWARDS.
SD Scientist | March 24th, 2008 at 3:30 pmJim,
Speaking of foreclosures, I think you should do a poll. I was hanging out with my dad and brother-in-law this weekend. We were talking about RE and Foreclosures. All three of us know people that have not paid their mortgage in 6 months or more yet have not been foreclosed on. The individuals are all in higher priced, 900K and up, homes.
I am wondering how many others out there know people in this same boat. It seems that the number of foreclosures(do to the delays in the process) is much worse than reports are showing. Once the banks get caught up, we will see numbers that make today’s RECORDS NUMBERS look small.
SMC | March 24th, 2008 at 3:40 pmSMC,
I know a couple as well. One of the most infuriating things I’ve had to experience.
shadash | March 24th, 2008 at 3:45 pm"except that rates are so low that some folks will even see their ARMs resetting DOWNWARDS."
It depends. Some people got into homes on a teaser rate of 1.25% or so. That sure will hurt if it goes to 5.8%
Simone | March 24th, 2008 at 4:22 pmLIBOR is still 5.3% so don’t think the insane political machinations of the FFR will help ARM holders. the lenders weren’t completely stupid. Most have in recent years transitioned to LIBOR away from FFR.
the other thing to worry about is "hanging on." We are hearing about the exceptions, the people who give up with the first reset. What we need to worry about are the people who are making minimum ccard payments to meet their mortgage or skimping on everything in the hopes of keeping the house. That big bulge mid 2007 is a lot of honest struggling families who may be only now reaching the point of being tapped out and ready to give up.
Rob Dawg | March 24th, 2008 at 4:36 pmCall me crazy, but I think these loans are the reason so many of the new homes in CV have in-law suites. Loan resetting? No problem, Dad’s got a pension.
CVman | March 24th, 2008 at 4:58 pmSimone
You need to stop thinking like yourself, a responsible borrower. The issue with resets is not the prime 5/1 reset going from 5.0% to 5.5%. The issue is Option ARMs and Neg Ams resetting to amortization payments. These are the mortgages that cause doubling of monthly payment. Home prices have started to decline do to the unavailibility of these products. The big declines will come when they reset.
LV Renter | March 24th, 2008 at 6:17 pmWhat LIBOR are you referring to? This says the libor is 2.51%.
Bankrate
daveg | March 24th, 2008 at 6:54 pmOn a side note:
Look at this idiot Realtor’s listing on Abalone Landing Ter in Carmel Valley. Who does he think he’s fooling?
Price Increased: 03/23/2008 from $999,000-$1,100,000 to $1,100,000
Jack | March 24th, 2008 at 9:12 pmPrice Increased: 03/06/2008 from $949,000-$1,049,000 to $999,000-$1,100,000
Price Increased: 03/02/2008 from $929,000-$999,000 to $949,000-$1,049,000
Price Reduced: 02/24/2008 from $999,000-$1,099,000 to $929,000-$999,000
Price Increased: 02/06/2008 from $945,000-$1,045,000 to $999,000-$1,099,000
Price Reduced: 01/16/2008 from $949,000-$1,049,000 to $945,000-$1,045,000
Price Increased: 12/13/2007 from $950,000-$1,050,000 to $1,049,000
Price Reduced: 12/05/2007 from $999,000-$1,100,000 to $950,000-$1,075,000
"LIBOR is still 5.3% so don’t think the insane political machinations of the FFR will help ARM holders."
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Nah. The 6 month USD LIBOR, which a large percentage of ARMs use as an index, was 2.54% today. Most of 3/1 and 5/1 ARMS that are re-setting these days had initial interest rates in the 5.5-6.0% range. With a margin of 2.25, for example, these folks are now looking at an adjusted rate of around 4.8%. Pretty fantastic rate. Their payments are going down.
My guess is that the Fed is going to continue to ease, the USD LIBOR is going to continue to drop and future re-sets are going even lower. Most people in these ARMS are looking at decreasing payments over the next several years.
RSS | March 24th, 2008 at 10:08 pm"The issue with resets is not the prime 5/1 reset going from 5.0% to 5.5%. The issue is Option ARMs and Neg Ams resetting to amortization payments."
According to the chart, option ARM and Neg Am resets don’t take off until late 2009 and don’t peak until 2010-2011.
1.25% teaser rates are long gone – those typically start to reset upwards as soon as 6 to 12 months into the loan.
SD Scientist | March 24th, 2008 at 10:10 pmThat chart is nearly a year old, but what it shows is that the majority of resets for subprime are almost over. That has been the biggest problem and has lead to the credit crisis. There will be spillover in that other borrowers are probably in over their heads, but the end of the liquidity crisis is near. This is one time where I wish I had done a 3/1 versus the safer 10/1. I’d be looking at a nice downward adjustment, but at the same time I can’t get a new Jumbo yet for a decent rate that would make a re-fi worthwhile.
JMH | March 24th, 2008 at 10:37 pmJack,
THANK YOU. I saw that come through this morning, and I couldn’t understand it. There’s another house on Marker that went pending with a SP of $815k. It fell out of escrow and went back up for . . . $849k. Huh? Who are these morons?
I’ve been wanting to mention these price increases, but haven’t really figured out where it would be appropriate. Anyway, what is the purpose behind doing this? Does this work? Is there some sort of theory behind this? I’m totally baffled.
SMC and Shadash, you bring up interesting points. I know there have to be more foreclosures out there, but I look at the listings every day, and I just don’t see them (I focus mainly on CV, Carlsbad, Del Mar, Cardiff, Enc.) I’m also waiting for sellers to start being more realistic, and I’m not seeing that either. I wonder who the morons are: the agents or the sellers. I’m guessing we’ll have to wait for a full Spring and Summer cycle before people figure it out.
The Blur | March 24th, 2008 at 11:06 pmNODs and NOTS are 3-9-12 months after resets. The bulk of the problem has yet to show up in the already historic defaults.
Rob Dawg | March 24th, 2008 at 11:10 pm"…but the end of the liquidity crisis is near" How about the solvency crisis?
The reason banks are not lending like they used to is they came to the realization people cannot pay back unless home prices increase. Remind me how the few people who bought for a reason other than an investment in 2004 are going to be able to make an amortization payment if they qualified with a stated income "Prime" loan? How long will the speculators renting properties out while making neg am payments continue to do so? Please let me know when escrow officers, general contractors, realtors, notaries, etc are making the $200K a piece they were making in 2005. Once again JMH how have you determined the liquidity crisis is over?
LV Renter | March 24th, 2008 at 11:12 pmBlur
Patience is key. Most people in prime owner occupied areas qualified with Pay Option ARMs. They can continue to pay less than interest, skip their taxes, and avoid the HOA. Many listed in 2006 trying to sell for the amount they paid, plus a refi, and closing costs. They have now pulled those homes off the market. They are all thinking the market will improve before their reset, without realizing everyone else is doing the same.
LV Renter | March 24th, 2008 at 11:17 pmPerhaps I am reading this chart wrong. But it looks to me that the Option ARMs don’t start resetting en masse until 2009 with them not peaking until late 2010 early 2011. Doesn’t this mean that late 2010 will be a bloodbath in the housing market with these option ARMs resetting, the buyers being unable to make the new payments (taking into account the negative amortization & higher principals), and the inability to sell the house for more than the principal on the loan?
Chester | March 24th, 2008 at 11:18 pmThe lower rates should benefit Countrywide neg-am borrowers, because the index used was the 1-year MTA. So that could stretch out the neg-ams resets another year or two. The lenders could suspend or raise the reset cap too. But either is just delaying the inevitable. I think the walk-away-ers will pick up the pace towards the exits this year, which could expedite the process.
Jim the Realtor | March 25th, 2008 at 12:00 amThe following is wild speculation but I am getting "vibes" that pretty much every active investor who bought 2005-2007 is planning on testing the market this spring. It’s almost like they don’t want to talk about it and want to get out before talking about it. Maybe our host can relate whether he’s seen the prep and polish that comes before a house designed for a quick sale.
Rob Dawg | March 25th, 2008 at 12:30 amSo this one came to me on my drive home tonight. I was thinking about why the banks are not foreclosing on these higher priced homes, it’s all about NOT reporting losses. (This may have been obvious to others, I am a slow learner).
When the banks start taking the hit on these more expensive homes, things are going to get very interesting. I have no doubt the total number of houses foreclosing will be very similar in all price ranges. (For every 100 at 300-500K there will be 100 at 800K-1.2M).
So if they foreclose on 100 400K homes they report a 40M loss, 100 1M homes cause them to have a 100M loss. They are basically “cooking the books” by not acting on these higher priced homes.
I would be interested to hear any other thoughts on this theory.
SMC | March 25th, 2008 at 2:06 am"except that rates are so low that some folks will even see their ARMs resetting DOWNWARDS."
Sure, they can refinance, if they have the cash to pay off the 15% of loan value that they lost with their lowered home value. With having to bring $100k to the table to refinance your new 8% rate to 5.5%, what would you do?
GMAN | March 25th, 2008 at 8:25 amSure, they can refinance, if they have the cash to pay off the 15% of loan value that they lost with their lowered home value.
I don’t think people get this.
You don’t have to refinance if you loan payment is staying essentially the same (or in some cases going down).
Now, it may be true that some have lost money on their homes, but that is different matter than a payment resetting to a higher level.
While I do think the Fed’s actions will not have a lot of impact on the market overall, in the case of resetting ARMs the lowering of interest rate will provide cover for the people who are legitimately living in their homes and who are able to make their current payment.
It may just be prolonging the inevitable, but it will slow the bleeding in a material number of cases.
daveg | March 25th, 2008 at 12:12 pm"but that is different matter than a payment resetting to a higher level."
Yes, and I think alot of people got those teaser rates, thinking that they couldn’t afford the house without them. Now that their resets won’t be as high, if they are using ARMs", many still won’t be able to afford it. But alot will stretch their finances and stay in their homes.
But the psychological factor of losing $100-200k in equity is strong on the psyche. That can be compounded by the fact that rentals in their neighborhood are for half their mortgage cost.
2008 should be interesting. I expected a max of 15% in declines in SD. In 2007, we’ve already hit 20%. Looks like pessmistic me was the overly optimistic one.
GMAN | March 25th, 2008 at 11:47 pm"But the psychological factor of losing $100-200k in equity is strong on the psyche. That can be compounded by the fact that rentals in their neighborhood are for half their mortgage cost."
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I see the own vs. rent differential as being the key. If someone is $100K upside down and they are shelling out an extra $2K/mo. (post tax benefit) to own, they have some hard thinking to do. Sliding into a voluntary foreclosure, stashing 6-9-12 months of payments and then stashing $2K/mo. as a renter may be the play, even if they can afford the mortgage.
Thanks to the LIBOR dive, however, I doubt we are seeing as wide a spread between owning and renting in most areas. People that are upside down $100K but are only paying $300-400/mo. premium to own may be more inclined to sit tight and see what happens.
RSS | March 26th, 2008 at 1:38 am