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That’s the $25,000 question as we roll in to 2008, and the highlight of today’s Wall Street Journal report on the ramifications of adjusting adjustable rate mortgages on the housing market. The stunning figure is the total number of mortgages resetting each and every month. The White House pegs the number at over 150,000. That breaks down to:
- 5,000 loans resetting every day
- 208.3 loans resetting every hour
- 3.5 loans resetting every minute
This torrid pace is only expected to continue through the first half of 2008, with devastating consequences to the housing market.
Banc of America Securities, a unit of [Bank of America], estimates that $85 billion in subprime mortgages are resetting during the current quarter, and the same amount will reset in the first quarter of 2008. That will rise to a peak of $101 billion in the second quarter. The estimates include loans packaged into securities and held in bank portfolios.
Larry Litton Jr., chief executive of Litton Loan Servicing, says resetting of adjustable-rate mortgages, or ARMs, has recently emerged as a bigger driver of defaults. “The initial wave was largely driven by a higher frequency of fraudulent loans…and loose underwriting,” says Mr. Litton, whose company services 340,000 loans nationwide. “A much larger percentage of the defaults we’re seeing right now are the result of ARM resets.”
These defaults are quickly becoming a major part of the housing market picture; adding up to 4 months worth of new housing supply to an already over-saturated market. What’s worse is that these foreclosed homes sell at a steep discount - some auctions in San Diego were seeing 33% price reductions at final sale - driving down sales prices and limiting options for home owners in the area.
The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year and another 1.44 million in 2008, up from 705,000 in 2005.
The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes, says Dale Westhoff, a senior managing director at Bear Stearns. This is a “fundamental shift” in the housing supply, says Mr. Westhoff, who believes that home prices will drop further as lenders “mark to market” repossessed homes.
Foreclosed homes typically sell at a discount of 20% to 25% compared to the sale of an owner-occupied home, analysts say. Lenders are eager to unload the properties, and the homes tend to be in poorer condition.
This is the chain reaction that is literally boxing home owners in. I talked about my neighborhood as one example where a couple of units headed to foreclosure has dragged the comparable sales down from the mid-600’s to the low 500’s; putting even those who put down 20% (like me) in a very tenuous position (to say the least).
So what does this mean? It has a couple of implications:
- If you are a home owner with an ARM that is set to adjust any time soon, it’s time to get moving on how you’re going to tackle that problem.
- If you are a home owner who is thinking about refinancing any time soon for a strategic reason, it’s time to get moving before your neighbor gets foreclosed on and wipes out your ‘equity’ with a comparable sale that will make you blanch.
For those of you in group 1, read this article on how to combat an adjustable rate mortgage reset. For those of you in group 2 you may want to consider this piece on ‘protecting’ your home equity with a home equity line of credit; and if you don’t know if you have an adjustable rate mortgage, watch this video on how to examine your loan documents to find out if you have an ARM or not.
What do you think? How bad will this surge in resets be for the housing market, and how will it compare to the upcoming Option ARM reset wave?
Sure, the growing wave of ARM resets is a significant concern. However, I think the REAL issue as to how severe our downturn will become is what the conservative home-buyer (who is facing no reset) will do if home prices depreciate a great deal.
Take someone who bought an $800,000 home in 2005 with a conservative 30 year fixed mortgage and 20% down payment, and a comfortable $40,000 in savings left over. What will the home-owner of such a property do if they see the identical home across the street go into foreclosure and sell for $500,000? Will they just suck it up and stick out the downturn? What if they see that a similar home model one block away is renting for half of their monthly mortgage payment? Will such home-owners just decide to stay in their house on moral principal if they get an opportunity for a promotion by moving to a new city (i.e. seeing as how they would never be able to sell their existing home since they don’t have enough savings to make the difference in value)?
Will the bank be willing to just forgive a couple hundred thousand of the mortgage for a gainfully employed home-owner who has savings and capacity to continue making payments? Maybe if they feel that such home-owners are likely to give up and walk away anyway (despairing that their home price will NEVER appreciate enough to make them whole again) the lenders would be willing to do partial mortgage forgiveness anyway.
The severity of the coming housing downturn will be determined far more by how the conservative home-owners respond to significant price declines than by anything that happens with the doomed ARM reset masses.
Prices are falling- that’s a fact. How’s it feel to see your down payment 20% vaporize into nothing? Stinks, huh?
Silly Mortgage broker- you can’t protect your home equity with another loan! You don’t use a hammer to do the job of a wrench! The losses are in now. More loans can’t fundamentally obscure the fact that many borrowed too much to buy overpriced houses that they couldn’t really afford. And that are losing value as we jabber.
Affordability improves when prices come down. Simple. Most people took those ARMS because they couldn’t AFFORD a fixed rate in the first place. They can’t refinance now:
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In Massachusetts, where the Patrick administration introduced a $250 million program in July as a “big piece” of its efforts to limit foreclosures, not a single loan has been refinanced.”
Wowza! Not much relief there. Why the low number?:
“The vast majority of the applicants aren’t eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible.”
=======
http://economicdisconnect.blogspot.com/2007/11/waiting-to-exhale.html
A minority of people for whom these loan products made sense can refinance:
KNOW you will make more salary two years (i.e. graduating doctor);
KNOW you will not stay in the house that long (i.e. military reassignment in 3 years inevitable);
Others took ARMS because they couldn’t afford the home in the first place.
Most of the advocacy groups (who work in the best interest of the client and not the banks) realize that it’s not in the person’s best interest to be chained to a money-losing bet on housing for the rest of their life. They advise most of their clients to walk away.
\EvIL laugh\
Many of these mortgaqedebtors now realize they get better deals without broker middlemen. We will soon see most of brokers going back to their old jobs as bartenders, credit card co. call-center workers, waiters, used-car salesmen, and hamburger flippers.
\EvIL laugh\
And some sleazy realtors are back dancing tables:
http://mioaklandcounty.com/blog/2007/09/09/another-real-estate-market-correction/
\Major evil laugh in the comments section\
It’s time to unwind this whole ponzi scheme. Just first let’s reform bankruptcy laws so that homeowners can more cleanly get free from these ridiculous debts. Put the losses on the financial engineers where they belong. That means reversing the debt slave bankruptcy provisions of 2005 bankruptcy law reform.
Earlier post? Hello?
I wish I had the link to this, but I don’t. I do remember it quite well, there was an auction in Florida where homes were going for 50% of what was owed (if they went at all). One I clearly recall was purchased for $1.25 mil one year ago, and the bidding went down to $400k before the bank decided to just take it back. No bidders at $400k, ouch!
As for the Option-ARM reset wave out in 2010, I see that as just lengthening the duration of the RE bust, it won’t make it more severe. Remember, this group is (generally) better able to weather their reset than the current group, and many of them will refi into a fixed rate before hitting their first reset (a co-worker of mine is doing just that).
For so long the media has reported this as a “Subprime Problem”, when the facts are that Subprime was just the tip of the mighty iceberg.
The next shoe to drop are on the Alt-A ARMs, and trust me, they will make us earn for the days where the market was just a “Subprime problem”
Head for the freaking hills, it is going to get sooooooo ugly.
Russ -
I agree with you 100% - it is time for this ponzi scheme to unwind. And yeah - it sucks to lose $125,000, but I won’t cry about it. I know that you can’t protect equity with another loan, but you can open up access to credit for use in an emergency if you need it.
I always appreciate your insight and comments - thanks for posting.
Morgan
Matt - I agree, this is not a subprime only problem. It’s a huge point that the mainstream media seems to be missing - BIG TIME.
Sniglet - That is a great point. There are so many variables that have unknown consequences. I think that conservative folks would be more inclined to ‘ride it out’ even if there is no way to actually do that. They probably are more worried about their credit and figure they can make up the losses later on. It’s not going to happen but that is probably part of the thought process. I think the bank would bet that they stay opposed to facing foreclosure and they won’t be forgiving any debt any time soon.
The main difference between the current “subprime” defaults and the pending ALt A & Option ARM defaults is borrower motivation (or lack of it). In my area (Upper Midwest), it appears that upwards of half of the current foreclosures are fraud-related. I’m not talking merely about stated-income fraud by bona fide owner-occupants (though there is that). I’m talking about fraud where the borrower had no intention whatsoever of making even payment #1. You know, situations where a house that sold for $200k last year sold for $300k early this year. Buyer, seller, agents, appraiser & loan officer colluded to jack up the price & steal $100k from the new servicing lender - splitting the proceeds. As soon as the lending industry created 100% reduced doc financing, suddenly people started bird-dogging prospective property buyers in bars: “What’s that I heard? You have a 661 credit score? Have I got a deal for you! Sign a few papers & we’ll give you $10 grand per property!”
In contrast, most Option ARM borrowers really want to keep their houses. They have kids in school and the whole nine yards. They were just dumb as rocks. They believed the billboards: “$300,000 loan for under $800/month!” Being innumerate, they did 80% c/o financing based upon a generous (bogus) appraisal. Now their loan balance has gone up while their house value has gone down. They’re upside-down (especialy if they did a second mortgage too), and there is no way out.
The current wave of forclosure borrowers at least had the common decency to collapse quickly - without even the pretense of having any intent to pay the loan back. The Option ARM bororwers are more likely to drag out the process with promises that they’ll soon get “back on track”, etc.
Nobody deserves a bail-out - banks or borrowers. Let the chips fall where they may.
These extreme stories of broker and personal greed may be true, I haven’t personally seen the flagrant abuses people have written about on this site but I wouldn’t put it past human nature. I think from my stand point this all started to unravel when FICO scores started to become the predictor of mortgage performance about ten years ago. Faster is not always better and at some point you cannot beat last years numbers without cutting corners at the very least. Add to that investors clamoring to invest in your product right now and you know what they say about computers, garbage in garbage out.
John Marks
I think that for many seeing what is happening today..those that were fortunate to get the fixed payment will do what their grandparents and parents did..they will stay put..you will find that the rate for the average homeowner to stay in their home will increase significantly..
For those that fear the unknown of moving around for employment..they will be the renters..those that will rent in a property for 2 years or more..not willing to commit to the chance of being “stuck” in or with a property…until the market becomes stable again…
The beginning of the year a 500 credit score, no money down, no closing costs to pay, little to no reserve or money in the bank, and on top of that a purchase at 100%+ of its actual market value.
ARM time… No equity, no money = no way to refinance. The costs can’t even be rolled in. It’s a lose, lose. It’s sad. I’m a REALTOR and I feel real estate agents, appraisers and lenders are somewhat to blame. Ultimately it’s the borrower and the one signing the documents but as professionals, we need to be more of a consumer advocate and less of a paycheck collector. It’s a sad situation for many families. I get calls frequently from homeowners asking if they can sell. Telling me their situations and begging for help. There’s nothing they can do.
http://www.youshouldown.com/blog.asp
I can’t believe that some people actually don’t know if they have an ARM or fixed rate mortgage. These people deserve to go through foreclosure.