More from C-L on the delinquent mortgages – can we work our way out of this?
We are hitting the peak months of resets/recasts, yet delinquencies are dropping?
The banks/servicers must be working feverishly to reset/recast the expected $1.6 trillion in ARMs, or just not reporting lates? When this is all done, will anyone be surprised that a whole lot of people got a whole lot of free rent?
(Click on this image to enlarge)
Revolution overdue now:
http://www.rollingstone.com/politics/news/is-the-sec-covering-up-wall-street-crimes-20110817
Soon it’s going to be “buy a house or go to jail”. Unless of course you work for a special interest who will get a waiver which allows their employees to rent.
It will be interesting to if the recast issue shows up like some expected or if those people in that position already defaulted to try the loan mod thing. It certainly helps that rates are rock bottom right now, but you still have the issue of negative equity in trying to refinance a Option ARM that is being recast even if you could afford the 30 year fixed payment. Looks like the peak drops off significantly in the next year so I guess we’ll see.
Theoretically the recasts would effect the higher tier markets so I guess we put the foreclosure watch on NCC for the next year and see if it’s just a bunch of hot air or if there was some truth to the matter.
I also wonder how much of our fragile economy is being propped up by the free renters. Thats a couple thousand or more a month they can spend. If suddenly the free renters had to pay rent, they’d have less money to spend in the marketplace…big double dip.
There’s about 8 million households in default so if you assumed $1000/month in extra spending because you don’t have a mortgage you get to right around 100 billion dollars per year. In a 14 trillion dollar economy that’s about 0.7% of GDP in a year.
Of course it isn’t that simple.. If they were paying rent then the landlord would have that money to spend, but in general landlords in the economy are probably more thrifty with their money.
“There’s about 8 million households in default so if you assumed $1000/month in extra spending because you don’t have a mortgage you get to right around 100 billion dollars per year. In a 14 trillion dollar economy that’s about 0.7% of GDP in a year.”
That estimated payment seems a tad light (imo).
Via Wiki “Average Joe” – “The median value of a housing unit in the US was $167,500 in 2005 with the median mortgage payment being clocked at $1,295.” – And, that’s just the estimate for a 1st. Additionally, some other estimates put total numbers at closer to 11 million households. How about 2% of GDP?
Maybe, but just because you don’t have a mortgage payment/rent doesn’t mean you’re going to spend every penny of that windfall. Obviously for some people in the free rent situation their entire motivation for buying in the first was to get rich, so if they want to live rich, then sure they might go ahead an spend every penny. Others probably are using the windfall to pay down other debt. Let’s just say somewhere around 1% of GDP all said and done, which in the case of 3 vs 2% or 2 vs 1% is a pretty big deal. 3% is decent growth, less than 2% is basically recession.
Jim – what do you think will be the impact of pay-option loans recasting? I’ve heard people say that with such low interest rates there will be little impact and that many of these loans have already failed or have been modified. However, after the recast these loans have to amortize over the remaining duration of the original loan – no more minimum payments with negative amortization. Wouldn’t a fully amortizing loan result in a payment shock for many borrowers?
I think the pay-option recasting threat is relative to the underwater-ness, and could be a lingering problem for years.
With rates so low, the recast adjusts the payment up about $300/mo. on a $500,000 mortgage, instead of the feared $1,000/mo.
I think people will endure the $300 bump for a year or two to see where it goes. But hopelessness could set in later if the negative equity persists – or gets worse.
I think the age of baby boomers will play a vital role too, because time is running out to retire.
Many loans are resetting at rates in the 3 to 3.5% range, when they started at 5-6%. The current low-interest rate environment has been quite friendly for some of these borrowers.
Contrast this to the sub-prime 2-year resets that were going to 7-8% or higher at the beginning of this wave. There the resets and recasts had a completely different impact than over the past years or so.
The primary objective of the game today is to delay and hope things get better, because in people’s minds they always will. I think it will just depend on whether things get better fast enough or not.