Tuesday, July 1, 2008

You ain't seen nothing yet...

We know that foreclosures rates are reaching peaks in various areas throughout the country. We know that housing pricing declines are reminiscent of the Great Depression. We also know people are routinely stating that the worst is over and the we have turned a corner. And everything was just contained to the subprime issues. The Washington Post must have missed the memo - for some reason they have an article that the worst is yet to come in an article called Resets Peaking on Subprime Loans.

First the article discusses the adjustable rate mortgages (ARMs) that helped bring about high foreclosure rates and mortgage problems we have seen so far.

Nationally, the number of subprime adjustable-rate loans resetting peaked at 7.61 percent of the loans outstanding last month, according to data from CoreLogic. More than 300,000 such loans will adjust this summer. CoreLogic's data covers about 80 percent of the mortgage market.

Lenders, federal officials and housing counselors have worried that borrowers will not be able to afford the higher payments after the reset and will quickly fall into foreclosure. Declining home prices have made it impossible for many of these homeowners to refinance.

But analysts and housing counselors have noted that while the interest rate decreases have helped some borrowers, others still face a rate shock because they had an artificially low introductory rate, known as a teaser rate, or other types of loans. Some homeowners face an 8 to 10 percent increase in their payments, said Bruce Marks, executive director of the Neighborhood Assistance Corporation of America.

Then we get to the real problems yet to come a the very end of the article -

Borrowers may face another significant problem when option ARM loans, which allowed them to make less than full payments, face increases, said John Taylor, president of the National Community Reinvestment Coalition. Those are not classified as subprime loans, but the borrowers will begin to see their payments spike in the next few years as they are forced to start paying the principal of their loans as well as the interest, he said.

"There is this second wave behind" subprime loans, Taylor said, "that is going to complete the tsunami."

This looks like a good time to revisit our Monthly Mortgage Rate Resets chart to get a good visual of just has happened and the "tsunami" that has yet to hit.

Remember one huge aspect of the option arms is that people can not even make the full ARM payment and 70% to 80% of borrowers can only pay the minimum. Paying the minimum required increases the principal every month. Therefor these properties have loans that are now bigger than they were when purchased at the peak of the Great Housing Bubble. So many of these properties are already underwater - that is just how the loans work. That is why they are termed negative amortization - one is not paying down the mortgage but adding to it.

From a review of the above chart waves certainly is a fitting description of the mortgage resets/recasts crisis. The first wave has hit and we survived - but the second wave is coming and what we will face may be nothing compared to what is coming. Or as the song goes "you ain't seen nothing yet."

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