Monday, September 27, 2010

The other shoe is about to drop

This is a graph of the Alt-A loans. Those are loans just a bit better than subprime. These loans were from people who had good credit but had difficulty proving their income like a sales professional who's salary varied due to commissions or investment income. Banks don't want to refinance because in most cases the value of the asset (the house) is below its original value and the current economy doesn't help either.
The other part of the time bomb is the option adjustable mortgages. Home buyers took them out not looking past the teaser rates. Even though the mortgage rates are at an all time low they are due to go up in the next year or two. If they start to rise by next year which should be the case borrowers are in for a rude awakening at their next reset.

From Money
There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

As you can see the ARMs are due to adjust about mid 2011. So the Bush legacy continues. He was the one who wanted everybody to own a house whether they could afford one or not.


S.W. Anderson said...

When adjustable-rate mortgages started becoming all the rage, I thought people were certifiably crazy for falling for them. I learned a long time ago that one of the most common fallacies widely believed by most people most of the time is that what is is what will be.

Evidently, suckers who signed up for ARMs had no idea the rates would ever go way up. Surprise, surprise.

Wonder how we got George W. Bush for a president, and Republican-controlled congresses from 1994-2007? P.T. Barnum had an explanation for it.

". . . that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less. . ."

There is no excuse for that. It should never have been allowed and should be made illegal immediately. Good indicator of how much clout the well-heeled crooks of the financial industry have, though.

The Blog Fodder said...

I don't understand your mortgage system at all. The several houses we owned in Saskatchewan over the years were all mortgaged through our credit union on 15 year amortization and one year fixed interest rates with weekly payments. That gave the lowest interest rate and the lowest total interest over the life of the mortgage. There was also a clause that we could take the principle back to maximum without rewriting the mortgage. We used that to finance our cars.

Randal Graves said...

Sir, why do you hate the free market?

Demeur said...

BF Fortunately for you Canadians are fairly smart with their money and banking system. I'm sure if Harpo has his way things would be similar to the mess the U.S. has at present. Prior to the Shrub taking office most mortgages were 30 or 15 year fixed or if you didn't plan on living in the place for more than 5 years a 5 year adjustable. Weekly payments would be a killer for those with variable income.

Randal Who said the free market was really free?

BBC said...

I don't have a solution, that I can enforce. But I admire the problem.

Hell, lets face it, there are no solutions that are going to work in this current system.

The only advice I can give others is to be careful and cover your own asses and don't take on anymore debt.

BBC said...

After a recent to a bank about property I was interested in I decided one thing I don't want to deal with is a goddamn bank anymore.

an average patriot said...

I am glad to hear you say that and blame it on Bush, Greenspan too! It really peeved me hearing that scum say everyone can own a house and live the American nightmare I mean dream. That scum did absolutely 100% everything and Repugs credit Obama and want to get back to Bush's agenda. We are fff'd if that happens!

Demeur said...

I agree Billy. A neighbor went to buy a house to take advantage of the $8000 credit. They went back 20 years to when he had a tax lien that had been taken care of years ago. What ever happened to doing a deal on a handshake? I bought a car that way a while back but the seller was an older guy and the car was mint condition.

Tim said...

I'm with Blog Fodder...we better come up with a solution soon. There are not enough rental places and at some point we will have tent cities again.

We always think we have the best way of doing things here. Obviously we don't.
I'm going for a 4 room tent as we want to live the good life.

Demeur said...
This comment has been removed by the author.
Demeur said...

Tim does that mean you're one of those haves?