Sunday, September 03, 2006

Nightmare Mortgages – It Will All Hit the Fan in 2007, Part 13

This Business Week article describes better than I could the huge impact risky mortgages are going to have on the housing market.

The article covers the following topics:

1) The proliferation of risky Adjustable Rate Mortgages (ARMs)

2) The proliferation of “Option ARMs” where borrowers can choose between several different payments every month, some of which don’t even cover the interest payment for that month.

3) How banks and other lenders pawn off the risk by packaging their mortgages and selling them as Mortgage-Backed Securities on Wall Street.

4) How mortgage brokers push Option ARMs onto their clients because of the higher commissions.

5) How banks and lenders have pushed riskier ARMS and Option ARMS to keep the housing bubble going after housing prices became unaffordable using standard 30-year fixed-rate mortgages.

Here is an excerpt:
For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket…

…The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
How popular are option ARMs?
Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they're not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs.
Considering that 30-40% of new jobs created over the last 3 years have been related to the housing boom (construction, real estate agents, mortgage brokers, framers, painters, appraisers, appliance salesmen), any ripple in the housing market could created tsunamis in the general economy.

The article cites specific examples of people who made unwise choices and are now in financial jeopardy.

Scary stuff.

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Links to previous "It Will All Hit The Fan in 2007" posts:
Part 1, Part 2, Part 3, Part 4, Part 4 (Addendum), Part 5, Part 6, Part 7, Part 8, Part 9, Part 10, Part 11

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Original link to this post:
http://thephantomrepublican.blogspot.com/2006/09/nightmare-mortgages-it-will-all-hit.html

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