Continuing to examine and hold a lively discussion of the Northern Virginia Real Estate market.
That's quite a spike in March and April of this year for the non-subprime categories. I know we are not an exact copy of the national averages for these mortgages, and also that many of these people have already jumped ship and sold prior to now, but this is going to be an interesting spring. I predict a spike in short-sale listings. Hmmm, how to track that... Frankly?
Interesting article from Rob Blake in march 2007 that put this chart in perspective.http://themortgageinsider.net/mortgage-news/hybrid-adjustable-rate-mortgage-recasting-will-cripple-the-housing-market/
With rates back down, does this matter as much as it did months ago? What were the average teaser rates?
Foreclosures lag resets by some number of months--maybe more with the government banning them for periods of time.So for FORECLOSURE projections, you should put that arrow a few months further BACK, and that means we are heading into more than a year of nice refreshing pause in soaring foreclosure counts.And, mortgage rates are at historical lows. And the libor and ted spread are crashing toward easy-credit lows--the credit freeze is thawing like butter hitting a skillet.So are prices still going to work down? Yeah probably, especially in the middle of winter in many cities. Maybe they'll even drop fast this winter, like the 2+% drop in the DC area in the month last reported in case-schiller.But any theory that says that foreclosures in the next year or so will be driving it harder, is probably too clever by half.
As I understand it, with option-arm loans there is a maximum balance allowable, that if hit, will automatically reset the loan to higher payments. (That is to say if you choose the minimum payment every month, the loan can actually adjust upwards earlier than scheduled.)If that is the case, we may see the option-ARMs hitting the foreclosure market somewhat earlier than indicated on this chart, since most of the riskiest borrowers are choosing the lowest possible payment most, if not all, of the time.
Someone asked me yesterday to post this presentation again, so here it is: (Amazingly detailed power point presentation on WHY there will be more pain to come in the housing market)--including predictions for many cities for the coming year: http://www.designs.valueinvestorinsight.com/bonus/pdf/T2_Housing_Analysis.pdf?ref=patrick.net
Heath,You asked about teaser rates resetting. Those were the subprimes and those are kind of the old news. Option ARM minimum payments are less than even an interest-only payment. When it recasts, it will mean squishing a 30-year loan into a 20 or 25-year loan, with subsequent payment shock that even a zero interest rate couldn't handle. The balance of the loan will also be 110% to 125% of the original loan at that point.I would like to see an updated chart of resets. The one I put up here is (I think) from 2007, and even in the excellent report Jane alludes to has a Deutsche Bank chart from late 2007. I don't know if perhaps some of those Option Arms have already defaulted, or if there is hope that they can refinance. Page 66 of that report shows that those loans are recasting faster than expected because of negative amortization (borrowers opting for the minimum payment every time).More wait and see, I think.
So the chart projects Option ARM resets, but with the mixture of minimum only payments and the decline in value, those resets will happen earlier do to triggers set up in the loan. So now people will have to make payments on loans that are even larger (20% more) than the ones they couldn't afford before, hence the minimum payments.So that sounds really really bad.
Even with the less dangerous loans, and low interest rates a lot of these will recast to higher payments because of teaser rates. From my understanding a lot of these loans the banks accepted negligible interest payments early and would accept market interest later. So while market interest rates are 6%-8% or less that's still a 4-5% jump over the teaser rate, even in prime borrowers. It's not as severe a jump and penalty as for subprime borrowers, but it's going to hurt, and that hurt is coming at a very bad time for a lot of people. Some of them will be able to afford the extra $200 a month, or squeeze it out of somewhere. But then there's going to be the whole 'why should I?' part of it. It's lost value and they're probably underwater. $200 more makes renting for $600 less a lot more appealing. Add in job losses and it could get bad. At this point in the housing market, I think it's psychology that's going to drive it more than raw numbers.
No the rate reset will be much worse because the teaser rates for option arms were sub 2%, and they jump to 6-7%. I remember getting offers in the mail from quicken loans offering to cut my payment in half ( we have a 15 year fixed @ 4.5% and plan on paying off my house within the next decade so they were barking up the wrong tree ). But the payment would then escalate to more than double the original amount if the minimum was paid, almost triple actually. I dont know who would get this loan if they could actually afford triple the payment, so my guess is 80% or more of these loans will default, with the 20% being people who already sold.
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