Mortgage News: September 2006

Friday, September 29, 2006

Real Estate Market Impact of New Lending Guidelines for Exotic Mortgages... Real Estate Prices to Suffer?


Federal Banking Regulators are tightening the belt on the loan qualifying guidelines for exotic mortgages for various mortgage providers under the FDIC, NCUA and OTS. This impacts major banks like Washington Mutual, World Savings and Bank of America.

Many mortgage insiders and economist believe the explosive housing prices over the last four years has been due to these types of exotic mortgages and relaxed qualifying guidelines.

The new guidelines are designed to make consumers more aware of the loans they are applying for via disclosures but more importantly is that they make it more difficult to qualify. We already attempted to do this in the past on our own with this pay-option ARM / Pick-a-payment mortgage calculator.

The item that has the most impact in the new guidelines is that mortgage lenders most now qualify buyers at the fully indexed mortgage rate for interest-only and payment-option loans.

What does this mean to borrowers and real estate prices?

Instead of qualifying for a mortgage at the popular 1.00% start rate banks will now qualify the buyer at the fully indexed rate. What is a fully indexed rate?

Index + Margin = Fully Indexed Rate

Many creative mortgages are based on the 11th. District Cost of Funds Index or COFI. This index is currently at: 4.177 %

The "margin" is what the bank makes, it's usually between 2.25% up to 6.75% but for our example we will use: 3.5%.

So, take the index 4.177% + margin 3.5% = fully indexed rate: 7.677%

As you can see this is a pretty significant difference in mortgage rates and there is a dramatic effect on mortgage qualifying. Here is an example of the impact on qualifying based on our mortgage qualification calculator

We will use this example: Qualifying at 2.00% start rate or fully indexed 7.625% based on $8,000 gross monthly income and $800 in revolving debt.

Mortgage Qualifying Differences:

at 2% Maximum Mortgage: $432,878
at 7.625% Maximum Mtg: $226,055

Assuming normal qualifying guidelines regarding income to debt ratios of 30/40.

That is over $206,000 difference in qualifying. If a large percentage of home buyers over that last three years used these types of mortgages to qualify and their new loan adjusts to the higher rate.... they can no longer refinance. This will create some significant issues in the near future.

Some of this properties will go to foreclosure or the owners will need to do a real estate short sale. Either way these properties become comparable sales as far as appraisals are concerned and this will apply downward pressure on home prices.

Additionally, these changes in mortgage qualifying will affect current home buyers who can no longer for a mortgage large enough to purchase a home, which will force property values down.

What do you feel will be the impact if current home buyers can no longer qualify for mortgage loans? Are lot's of people going to lose their shirt?

Tuesday, September 26, 2006

Looks like Risky Lending is Not Just a US Problem


Here is an article from Australia that states that risky loans are also causing problems in the land down under.

Monday, September 25, 2006

Great Explanation of Home Sales Data

You may have already read the existing home sale data which indicated a national drop of 1.7% vs. August of 05. There will be lots of talk about this but I found this article from the Montley Fool which helps to explain the interpretation of the data.

It's a great read and well worth the few minutes.

Wednesday, September 13, 2006

Foreclosures up 53% over Last Year... Partly Due to Adjusting Mortgages


Cnn released a story titled, "Foreclosures Spike in August" which quotes a 53% increase in national foreclosures with some (not surprisingly) hot spots like California, up 160% since last year. According to the report, Rick Sharga of RealtyTrac's states the rising foreclosures are in part due to adjustable rate mortgages.

They quote a 5/1 Adjustable rate mortgage that would be resetting and the first adjustment would tack on 2% to the interest rate. The article indicated a $200,000 loan would cause a jump of $250 in monthly payments but that does not assume an interest only first mortgage.

Here is the actual numbers making an assumption of a $200,000 originally at 5% that was fully amortized. Original payment would be $1,074, the new payment $1,410. That's a $340 increase (31.657%) of the borrowers "net" income. Pay raise or not, this people are in trouble.

Now here is an even more common scenario ran through our 5/1 adjustable rate mortgage calculator which would be fairly common in California.

$300,000 loan amount originally at 5% "interest-only".

Original mortgage payment: $1,250 a month
New mortgage payment: $2,120

An increase of $870 a month or 69.6% increase. Ouch.

We would like to take a little survey... you can stay anonymous, please indicate the terms of your current loan and what state you are in, so we can get an approximate idea of what types of loans most people have.

For example: $200,0000 30 year fixed rate, texas

Also, if you currently have an interest only loan as indicated in the story, we you aware by how much your mortgage payments could increase?

Tuesday, September 12, 2006

Prediction of a Real Estate Recession



Here is a sobering article from the NY Sun predicting a real estate led recession where property values in some cities could drop by 40% or more. In part the story talks about the effect of the previously popular pay option adjustable rate mortgages would take on some households to assist the downturn.

Only time will tell but what are you thoughts? Can a decrease in real estate prices cause a recession? An interesting theory that may indicate we are already headed there points to auto sales originally from an article in the Ny Times.

Adjustable Rate Mortgages Causing Increases in North Texas Foreclosures

This report coming from NBC5 indicates that nearly 4,000 homes in North Texas are facing foreclosure this month alone. The article seems to indicate that adjustable rate mortgages may be a large cause of this run up.

It's important for customers to really understand their current mortgages and take appropriate actions before trouble comes, as once someone is late on their mortgage payments it's nearly impossible to refinance.

Do you know of anyone who is currently facing trouble because of an adjustable rate mortgage?

Adjustable Rate Mortgage Getting More Bad Press... For Good Reason?



The Greater Baton Rouge Business Report reported that "People who finance their homes with ARMs may not realize the risks involved and often find themselves in serious financial situations as a result."

The article cites a few cases with relatively small loan amounts of $85,000 and the customer getting a 30% jump in mortgage payments which forced her to get a second job just to make ends meet. My concern is that in places like California, New York and Florida many more people have these loans and they are even less prepared for significant 50% - 75% increases in monthly payments.

We have created a few different mortgage calculators where you can get an idea of what to expect at your first adjustment based on the type of loan you have.

Many of these article point out that the consumer was unaware that such a big jump was coming... if you are one of these consumers, please share you story with us.

Tuesday, September 05, 2006

Option ARM / Neg Am Loans Grilled by BusinessWeek





Option ARM / Neg Am Loans Grilled by BusinessWeek

In case you haven't heard the buzz yet about this BusinessWeek article regarding the popular "Pay Option ARM Loans" with artificially low rates, it may be worth it for you to read it now. Especially if you think you may have one of these types of adjustable rate mortgages. If you do have this type of mortgage check this pay option arm / pick a payment mortgage calculator to review the real numbers.

The pay-option ARMS will not cause the most pain in the short term because the recast period is fairly long and the payment adjustments are minor (although the accumulated negative amortization is not) as indicated by this pay-option arm mortgage calculator.

The one to fear is the 100% 2/28 interest only loans (often done as a piggy back loan 80/20). When these adjust for the first time, they have the largest monthly payment adjustment. Here is a 2/28 adjustable rate mortgage calculator. Running a scenario of: 300,000 that started at 5.5% interest only (rate about two years ago), the very first payment adjustment would jump the payment from $1,375 to $2,139, a $764 adjustment that represents and increase of 55% in the payment. Combine this with the fact that most people who obtained this type of mortgage probably did a "stated income" loan which is also falling out of favor with the mortgage lenders and these people will not be able to refinance due to their income to debt ratios and possibly not be able to sell, leaving no option but foreclosure or short sale.

Do you have one of these two types of mortgages? If so what are your thoughts as an actual borrower? Afraid? Already refinanced? Not Sure?