THE NEWS BLOG

 
Steve and Jen bring you this daily review of the news
Premium Advertiser

News Blog Sponsors

News Links

BBC World Service
The Guardian
Independent
Washington Post
Newsday
Iraq Order of Battle
Agonist
NY Times
LA Times
ABC News
CNN
Blogger

 
Blogs We Like

Daily Kos
Atrios
Digby's Blog
Skippy
Operation Yellow Elephant
Iraq Casualty Count
Uggabugga
Media Matters
Talking Points
Defense Tech
Intel Dump
Soldiers for the Truth
Margaret Cho
Juan Cole
Tbogg
Corrente
Gropinator
Just a Bump in the Beltway
Baghdad Burning
Wonkette
Howard Stern
Michael Moore
James Wolcott
Cooking for Engineers
There is No Crisis
Whiskey Bar
Rude Pundit
Driftglass
At-Largely
Crooks and Liars
Amazin' Avenue
DC Media Girl
The Server Logs

 
Blogger Credits

Powered by Blogger

Archives by
Publication Date
August 2003
September 2003
October 2003
November 2003
December 2003
January 2004
February 2004
March 2004
April 2004
May 2004
June 2004
July 2004
August 2004
September 2004
October 2004
November 2004
December 2004
January 2005
February 2005
March 2005
April 2005
May 2005
June 2005
July 2005
August 2005
September 2005
October 2005
November 2005
December 2005
January 2006
February 2006
March 2006
April 2006
May 2006
June 2006
July 2006
August 2006
September 2006
October 2006
November 2006
December 2006
January 2007
February 2007
Comments Credits
Comments by YACCS
Tuesday, July 18, 2006

The coming mortgage crash



Atrios linked to this article from The Big Picture. We usually don't do much economics here, but this is going to be a massive story. All those cute house flipping stories on HGTV, well, it won't be so cute much longer.

The Impact of Variable Rate Mortgages

We noted earlier in the year (here and here), that the $2 trillion in mortgage resets won't impact the consumer as much as many fear.

The key issue will be how many people will NOT be able to refinace in advance of the coming resets. The impact on the Real Estate market, however, is potentially significant, as detailed in a Damon Darlin column on Saturday :

"As home prices appreciated from ridiculously high to unbelievably higher, more Americans began using mortgages that allowed them to buy more house for less of a monthly payment. Next year, a large portion of those rates move up and homeowners who opted for the exotic mortgages could find their payments doubled. Talk about bloody. They need to find a way to minimize the pain.

Many will refinance their loans. But for others, whose mortgages now exceed the value of their homes or whose debt payments exceed 40 percent of their incomes, there may be no other solution than to get out of their houses. With the housing market cooling, selling it may not be easy. Some may default on their loans.

With more homes on the market, prices could begin to fall. That reduces home equity — the difference between the amount borrowed and the total value of the home — and could force people whose loans change in 2008 and 2009 to consider selling, further accelerating the drop in prices. Some of those cities with the highest proportions of interest-only loans are also at the greatest risk of falling prices." (emphasis added).

Here's what the data looks like:

"In 2003, of all new mortgages, 10.2 percent were interest-only, meaning the homeowner paid only the interest for the initial period of the loan. According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month."

The problem is more concentrated in some regions: "In most California cities, as well as in Denver, Washington, Phoenix and Seattle, interest-only loans represented 40 percent or more of all mortgages issued in 2005."

Here's how this plays out:

"Traditionally, interest-only loans and adjustable-rate loans were used by people who expected to live in a house only a short time, but such loans have turned into “affordability products” as housing prices rose. The interest rate on the loans, while below that of conventional 30-year fixed-rate mortgages at the beginning, resets after 3, 5, 7 or 10 years, depending on the loan. So, homeowners who took out loans in 2004 could find, for example, that their initial 4.25 percent loan climbs to 6.25 percent or 7.25 percent next year.

Someone now paying $350 a month for a $100,000 interest-only loan could be facing payments of $680 both because of the shift to the higher rate and because the borrower would have to start paying off the principal as well as the interest."

So while the majority of homeowners (and therefore, the lion's share of consumers) are likely safe, there is still the Real Estate market to consider:

In any speculative market, one of the key risks is forced sales. In equities, its when the margin clerks walk around a firm, literally hitting bids indisciminately. Its as per legal/regulatory requirements -- if you don't have the cash in the acocunt -- WHACK!

The scenario laid out above is similar -- on the margins, a small number of speculative defaults lead to forced liquidations.

Since the marginal speculators helped drive prices skyward, its no surprise that the double whack of the loss of speculative buying plus forced selling can impact a neighborhood or even a region (I'm thinking Miami condos and houses in las Vegas) quite strongly. The key determinant as to the impact on a region will be the percentage of people whose "mortgage exceeds the value of their homes, or whose debt payments exceeds 40 percent of incomes." These people may be unable to refinance, and will be ripe for foreclosure.

Note that mortgage delinquencies and foreclosures remain low nationwide, including the areas where prices appreciated the most.

>

UPDATE JULY 17, 2006 1:59pm

Here is the accompanying map from NYT


Source:
Keep Eyes Fixed on Your Variable-Rate Mortgage
DAMON DARLIN
NYTimes, July 15, 2006
http://www.nytimes.com/2006/07/15/business/15money.ht

posted by Steve @ 12:01:00 AM

12:01:00 AM

The News Blog home page





 

Editorial Staff
RSS-XML Feeds

Add to My AOL

Support The News Blog

Amazon Honor System Click Here to Pay Learn More
News Blog Food Blog
Visit the News Blog Food Blog
The News Blog Shops
 
 
 
Operation Yellow Elephant
Enlist, Young Republicans