Is a Mortgage Melt-Down Around the Corner?
If it’s going to come, this is probably about the time:
Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. “We have clients with 720-plus credit scores, and they are in awful products,” says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says.
Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who “probably bought more house than they could afford and then took on more credit-card debt” to furnish the house and pay for the move. When the housing market cooled, they were “caught in the middle,” unable to sell their home or refinance and make their debt load more manageable.
Lenders are also tightening their standards. At a meeting with investors last week, IndyMac Bancorp Inc., the nation’s largest Alt-A lender, said it had raised the minimum credit score at which borrowers could finance 100% of a home’s value and took a number of other steps to tighten lending guidelines.
This article from about a month ago ties in to the problems mentioned. Here’s the money paragraph from it:
….. With ARMs, “the tag line you always hear…is you can refinance with no problem,” says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Ms. Keyes. “But it is a problem.” The appraisal for Ms. Keyes’s last loan was inflated, he adds.
Let’s see:
- Dangerous loan products.
- Government-sponsored enterprises (GSEs) like Freddie Mac and Fannie Mae lowering approval standards from about 2003-2006.
- Inflated appraisals, possibly widespread.
- Lenders who have closed deals when they often knew darned well that the borrowers were probably buying trouble.
- Ignorant, naive, too-trusting borrowers.
- Bankruptcy “reform” that could be forcing more borrowers into foreclosure before they fully realize what is happening to them.
- Now, a possible overreaction (perhaps egged on by Congress) in standard-tightening by the GSEs and lenders. Here’s some evidence from USA Today that this is indeed happening on the lender side, while this subscription-only item at March 12’s Biz Weak says that Freddie Mac and others “are finding religion by instituting tougher underwriting rules.”
Well, you can’t say the mortgage-lending industry hasn’t gone all-out in trying to screw the whole economy up. I still don’t think they will, but they certainly deserve a Devil’s “A” for effort.
Foreclosures were up 50% last year and in our area, they are up another 70% so far this year. More than 25 lenders to the subprime market have closed their doors THIS YEAR.
Things I have seen reported: Countrywide has reported a 19% default rate for loans issued in 06; Memphis had more foreclosures than home sales in 06; Phoenix has over 55,000 listings in the MLS (Chicago has a similar number but 1.5m more people); 14% decline in existing home sales; 60% decline in new housing starts; 1 trillion in ARMs resetting this year, most with a 2-3% increase in loan rates (a 2.5% increase on a 200,000 mortgage is $330 more a month;
Here is a typical 3yr ARM I have been seeing:
Initial rate 6.5%.
Index rate 5.5 + LIBOR
Initial cap 3%
6 month adjustments
Max adjustments 1%
2004 Loan of 200,000 payment of $1,264 (no escrow)
2007 First adjustment
LIBOR of 5.3 + 5.5 = 10.8% max adj 3% = new rate of 9.5%
new payment $1,589
2007 second adjustment
LIBOR of 5.4 + 5.5 = 10.9% max adj 1% = new rate of 10.5%
new payment $1,724
2008 third adjustment
LIBOR OF 5.5 + 5.5 = 11% max adj 1% = new rate of 11%
new payment $1,790
A 41% increase in the monthly payment! I have seen index rates as high as 8.5%
A trillion dollars at $250k per loan is 4 million households facing the above. How many do you think will be able to afford a 41% increase in their mortgage?
Comment by Tracy Coyle — March 7, 2007 @ 6:00 pm
#1, I’ve heard about those run-ups too. I’m not worried about the home-sales declines (I figure sellers are holding out as long as they can) as much as the foreclosures.
Like I said, they’re trying to ruin the economy….
Comment by TBlumer — March 7, 2007 @ 6:18 pm