Thursday, August 02, 2007

Mortgage: implosion

Starting in the spring of 2005, these adjustable rate mortgages began to get a lot more popular, largely because regular mortgages no longer allowed many buyers to afford the house they wanted.

They turned instead to a mortgage that had an artificially low interest rate for an initial period, before resetting to a higher rate. When the higher rate kicks in, the monthly mortgage bill typically jumps by hundreds of dollars. The initial period often lasted two years, and two plus 2005 equals right about now.

The peak month for the resetting of mortgages will come this October, according to Credit Suisse, when more than $50 billion in mortgages will switch to a new rate for the first time. The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the nation’s total, will reset for the first time this year or next. A couple of years ago, by comparison, only a marginal amount of mortgage debt — a few billion dollars — was resetting each month.

So all the carnage in the mortgage market thus far has come even before the bulk of mortgages have reset. “The worst is not over in the subprime mortgage market,” analysts at JPMorgan recently wrote to the firm’s clients. “The reason for our pessimism is that loans originated in late 2005 and all of 2006, the period that saw peak origination volumes and sharply decreased underwriting quality, are only now starting to reset in large numbers.”

The flood of those homes onto the market will further depress house prices. So will the newfound conservatism of mortgage lenders, which will make it harder for tomorrow’s buyers to get a mortgage. (Thank goodness.) The S.& P./Case-Shiller index of home prices covering 10 major cities has fallen about 3 percent since its peak last summer. Two or three years from now, JPMorgan predicts, the index will have fallen 15 to 20 percent. Adjusting for inflation, the decline will be worse.

There has never been a real estate bubble like the one of the last decade. So it’s impossible to know what the bust will bring, especially when there are still so many mortgages that are about to get a lot more expensive.

From: via NY Times Aug. 3rd


Anonymous Anonymous said...

Your comment of resets adding a few hundred in monthly payments I think is too mild. I thought many of these loans go from 1% rates up to 4% maybe even 6% at the first reset. That is a 400% to 600% increase -- much more than a few hundies on even the cheapest of Bay area homes.

Of course we may see a short term increase in consumer spending and the economy as the FB realize they cannot afford their reset, cannot refinance, and simply decide to live rent free for the 6 months plus it will take to foreclose on their homes.

7:30 AM  
Anonymous HellBoy said...

Morgage Implosion? We may not have seen anything yet around here in the Bay Area. According to this article

The secondary market is going into "vapor lock" which means higher rates for all non-conforming loans. That's for new loans and refis. This will affect high cost areas big time. Things may finally be starting to get ugly around here?

8:07 AM  
Anonymous Anonymous said...

I'm reading all the above comments and I must agree it's gotten pretty bad out there. Now we know the houseing markets have not seen anything like this in a long while and the whole "doom and gloom" theory has resurfaced (I say resurfaced because we've heard this before)
Is there fallout going on right now YES, we see it with forecloser numbers going up everyday.
We see lenders dropping like flies or rasing their rates and cutting programs on a daily basis.
By this time we've all seen the FED drop close to 40 Billion into the market, and we're hearing next month when they meet they are likly to drop the prime rate by 1 to 1/2 point.
On the street we keep hearing some people (I say some because it's not the majority) say it's about time the market changes and starts dropping it all needs to come down and we need to see the tree shake out. In theory that sounds great, But let's not forget that we've had an economy based on the houseing market for the last 5 or so yrs, and the "shake down" can have very serious effects to our economy. The other part of that arguement I keep hearing about is people were just living beond their means. Though I will not deny some people were or are living beyond their means BUT the majority of people were'nt or are not. What people experenced were the jobs they had that made 75K a yr drop to 50K at the same time energy,food,medical,all living costs greatly jump.
And let's not forget that we are a consumer nation without people out there purchasing Televisions,cars, etc we'd go back into economic slump. So I can't be too upset with the over buyers.
People out there are going to have their mortgages reset and that's not a very positive thing BUT they can still come out on top.
We've found a company ROCK SOLID FINANCIAL (
They've got some pretty good programs that not only pull people out of forecloser but because of their private investors (from what I've heard) not reliant to the markets are able to do loans other can't or wont. This market is too sensitive and if they end up letting it go down the drain lets just say someone loosing their home would be a least of their trobles. BTW I'm only using Anonymous because I dont have a user name and didn't want to have to retype this whole thing by getting one (don't have the time BUT then again who does?)

10:24 PM  
Anonymous Anonymous said...

I dont think its all unreasonable to think that prices thoroughout the Bay Area could take as much as a 50% hit in the next 6 months.

Im in the market and can easily snatch up prime property (assuming I could get financing now!) at 70 cents on the dollar of the asking price and expect it to be at 2 quarters on the dollar or less by Spring 2008.

11:45 AM  
Anonymous Anonymous said...

I dont think its all unreasonable to think that prices thoroughout the Bay Area could take as much as a 50% hit in the next 6 months.

Orange County, CA, saw a 50-60% drop between 1995 and 1997. I know because I got caught in it.

2:15 PM  

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