The NY Times is finally catching on to the house trap.
Edward and Maria Moller are worried about losing their house — not now, but in 2013.
That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.
Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.
It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.
With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.
The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.
“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”
,,,,,,,
Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.
The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.
,,,,,,,,,,,,,,,
The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.
“Everyone out here always preached to me, ‘Buy real estate. It’s the best investment you’ll ever have,’ ” said Mr. Moller, who grew up in Iowa. “Then all this stuff started crumbling and I was like, ‘You’re kidding me.’ ”
While default may be a long way off, the prospect is already dampening the couple’s spending habits. They are postponing the new windows the house needs. They recently bought a 2005 Nissan Murano instead of a new car, and they have put off buying a flat-screen TV.
Mark Goldman, a San Diego mortgage broker, said many interest-only buyers thought they would be in control when the loans reset. “They expected to move or refinance,” he said. “But you can’t do either when you’re under water.”
Among the people Mr. Goldman put into interest-only loans was himself. He refinanced five years ago to shrink his payments so he and his wife, Julie, could put their two sons through college. When the interest-only period expired a few months ago, their payments went up by 40 percent.
The Goldmans have been in their house for 20 years, which means they still have some equity. Still, they are unhappy to find themselves in “a world different than we planned for,” said Mr. Goldman, a lecturer in real estate finance at San Diego State. “If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”
,,,,,,,,,
Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700.
“I understand I took a risk,” Mr. Janis said. “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.
Homeowners with interest-only loans have a much greater likelihood of default, the First American CoreLogic figures indicate. Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada.
To all us Piggingtonians, it's all old news, but, for the NY Times to be covering
this is a good start.
One of the people cited is a Real estate finance lecturer.
wow, hoisted by his own petard.
and should we feel sorry for these dimwits? People with such a level of financial ignorance should be banned from receiving any loan PERIOD! Instead they were given 100% financing...idiotic!
Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700.
$6700 for a lawyer ? that is 30 hours of work.
Come on, just pay off your debt.
Is it just me, or does NYT spend way too much time chronicling the foibles of us Californians? Aren't there plenty of New Yorkers in similar straits? Like, that Geithner character?
"They recently bought a 2005 Nissan Murano instead of a new car, and they have put off buying a flat-screen TV."
So sad. It is not fair what is happening to these poor people...
So sad. It is not fair what is happening to these poor people...
Oh dear! My heart goes out to them. They are truly in the throes of poverty.
The Goldmans have been in their house for 20 years, which means they still have some equity. Still, they are unhappy to find themselves in “a world different than we planned for,” said Mr. Goldman, a lecturer in real estate finance at San Diego State. “If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”
Mr. Goldman, I give you a grade of "F" for your own class. Yes, the one you teach. How pathetic.
my car is over 20 years old, i dont own a tv, i ahve 100k in the bank and i never bought a hosue. wher edo i fit into the matrix
Well, Scaredy, when BO and the fed inflate the debt away, you'll be in a world of shit. We are collectively running between the economic raindrops. In the end, we'll all be wet.
it always seems like there should be a way to nimbly duck for cover under an awning. i've done that before in my life. not figuratively, I mean literally. Avoided getting wet in giant rainstorms. it's really very pleasant to stand under an awning, watching heavy rains.
My wife & I both have a very well funded saving account, paid off both cars, zero debt and very stable jobs with decent income.
Can I afford an Interest Only loan?
Definitely not!
These are greedy people making ignorant decisions. They deserve to pay for their own mistakes.
If people these(ie., professors and lawyers) can fuck it up so bad, imagine the SIZE of this problem. More foreclosures WILL come and price WILL come down even more.
Mark my words.
it struck me there is only one class of buyer who will use an I/O loan
effectively. Someone who by nature will have a very serious
increase in their income soon. Recent graduates from med school,
People starting new small businesses (Franchises), people
in apprenticeship programs.
But that's maybe 1-2% of all buyers. I/O's are otherwise a tool for
flippers. if you aren't amortizing the debt you will see a big spike in
payments, and for what?
The logic was "Property is skyrocketing, get an I/O now, then
when you have 80% equity re-fi". Gee, why not get a 5/25 ARM
pay on an amortization schedule and then in 5 years look at re-fi.
I/O's combined payment risk with interest risk.
I'm hanging out here in DC, because 50% of all sales in 2005 were
non-traditionals and when those I/O's go amortizing they will
all go into default within 90 days.
I read the article and that's all fine and dandy. Yes, lots of people who won't be able to make their payments. What does that mean for the real estate market? I see plenty of NODs, but banks not foreclosing on all of them. The ones that get foreclosed upon, a few get listed and some just sit empty, and one gets occupied by a banker throwing parties Great Gatsby style.
I just want to know what's going to happen. Are people just going to live there for free forever? Are the banks going to just hold on to them for years while they sit empty? Or is everyone just waiting for inflation to kick in and then houses will go back to peak prices. And will it go to peak prices and beyond even? Some of these buyers just bought to flip, you know.
My brother did an 80/20 with interest only on the 1st. Using the extra cash flow to help pay off the 2nd in 5 years. Then he'll power down his 1st with huge principal payments. There another class of buyer. I'm sure there are others.
how would that be different from a 97% with 30 year amortization?
Was pre FHA stuff a couple years ago. No PMI, cheaper easier loan qualification. He makes a lot of money but got his savings cleaned out by crazy ex-wife.
Banks found that it was much less risky to give someone $400,000 and $100,000 to buy a $500,000 shack than it was to give them $500,000. Those clever bankers!
my car is over 20 years old, i dont own a tv, i ahve 100k in the bank and i never bought a hosue. wher edo i fit into the matrix
That's easy, you're a hard working sheep ripe for a shearing, just like the rest of us.
If you save your pennies they'll rot their value away with inflation.
If you borrow some pennies and lose your job they'll get the assets you bought with them.
If you borrow some pennies and manage to hang on to your job and make the payments then you get to keep your head above water and hang onto the assets you bought.
It's a debt-based system, don't expect it to work in your favor if you aren't in debt.
Back to work, SLAVES!
This is a perfect example of why I refuse to shell out good dollars to get an MBA at San Diego State. Don't get me wrong, you can get a decent education for a reasonable price (unlike some of the UC MBA programs) and I'm sure not all the professors are bad, but I have to seriously question the legitimacy of certain courses. A finance professor should know better.
Patb, I don't see why there is only one class of buyer who will use an I/O loan effectively.
But that's maybe 1-2% of all buyers. I/O's are otherwise a tool for flippers. if you aren't amortizing the debt you will see a big spike in
payments, and for what?
For those with 10 yr I/O loans, I don't see why they could not afford the payments in the future?
Assume when they purchased a home with $3800 payment at 30% debt to income ratio. This would be about $152k annual or $13.7k monthly household income. Not much of a stretch. Now, fast forward 10 years with at nominal 3% annual pay increases. The income now would be $204k annual or $17.0k monthly. There is $4k of additional income to pay the maximum $2800 increase to $6700. If the borrowers happened to paid all their bills in the 10 years, they should have enough income to pay for the increase. If they did not work for a company that gets 3%+ year over year annual pay increases, then this type of loan wasn't for them.
I have a coworker and his wife in a secure aerospace jobs that did the 10 yr IO loan in 2004 and he and his wife gets at least the annual 3% increase each and every year. Now, they may be upside down, but they still will be able to afford the payment. I believe his means met his ends and may come out unscathed. My coworker had to move to get his kids into a better Jr High & High School. The 3 and 5 yr I/O loans will have problems under these specific conditions.
I highly doubt there is any 10 yr I/O loans available, I haven't checked. I might actually consider it now that home values are somewhat down and if we are in for a high inflationary period. I would even put my bank money as a down...
Lucky In OC
10 year I/Os are still available.
I looked into it but if 1 year LIBOR rates go back to historical norms, the payment shock at the 10 year mark will be nothing short of astonishing.
Chances are that one would be able to sell or refinance, but ... stuff happens.
lucky
why not a 10/20 ARM?
Then you are making amortizing payments and the payment transition
is far less shocking.
Lucky
There are no secure aerospace jobs. it's a terrible industry.
"There are no secure aerospace jobs. it's a terrible industry."
A large part of San Diego's aerospace industry (General Dynamics Space Systems division) has moved to Denver - if I were serious about working in the aerospace industry I would relocate there - not sure I would call Denver aerospace jobs 'secure' but at least they exist
"why not a 10/20 ARM?"
I have a 10/20 fixed - the first 10 years are interest only - the last 20 are fully amortized - the interest rate is fixed for the entire 30 year period
This loan made sense to me - the first 10 years of a mortgage barely touch the principal anyway so why not pay interest only? - the difference in payments between a 20 and 30 year amortization schedule is minimal (a few hundred bucks per month) - the interest rate is fixed so there won't be any surprises
don't know if this loan product is still available today
4plex,,
I think that this loan is still available. I don't recommend them. This is really a sucker's loan. It's ignorant to say that "the first 10 years of a mortgage barely touch the principal anyway so why not pay interest only"
It's expensive money. Simple answer.
'expensive money' is relative - money isn't expensive when it is invested and the return is greater than the interest rate on the mortgage
Gold Bull Market
also, this mortgage is less than a third of my property value even in today's depressed market - with the crazy runup in property values between 1998 and 2006 I wanted to take some of my real estate gains off the table without having a large monthly payment - the 10/20 loan met my needs and I'll keep it as long as it makes sense - if interest rates go to 20% (remember the '80's?), I've got a fixed-rate loan for 30 years and now we are talking about CHEAP money!
different needs, different loan products
There are no secure aerospace jobs. it's a terrible industry.
Patb, I agree with you, the 'general' aerospace industry is not secure.
However, the products my company make cannot be relocated:
- Most management lives within minutes of the facility
- Key engineering personnel would not relocate
- Cost to move or buy capital test equipment
- Cost and delay to requalify all products in new facility
- Union shop
Our product is one manufacturer of two in the world. The other is foreign owned. It is impossible for a new company to start with out legacy product. We supply commercial and government products to several satelite companies. The only way to relocate this type of facility would be slowly moving mfg dept by mfg dept.
I am sure their are other companies, unions, or government jobs that have fixed increases at or above 3%. Let's see... SDGE, DWP, MWD, SC Edision, PGE, Sempra Energy, State employees (who can't be laid-off), UC teachers,
4plex, the 10/20 ARM may be exactly what he has. I will have to check. He did mentioned his rate increase is limited each year. This would make it even better.
I did find a 10/20 ARM for a $417k loan/ $500k value @ 4.625% with $400 in fees.
Payment = $1,739; Income = $70k @ 30% LTD
Initial Cap: 5%; Period Cap: 2%; Max Cap: 5%
In 10 yrs, the payment for the 20yr fixed for a $417k loan @ 9.625 with no fees.
Payment = $3921 maximum risk.
Delta = $2,182
A 30 yr fixed (for comparison only) @ $5.375% with $1234 in fees.
Payment = $2,335
I couldn't make the numbers work for someone buying at max LTD ratios. The $70k income only came up to $93.4k per year at 3% annual increases. They would need to be at 9% annual increases or $201k to make up the difference. I am now under the belief 10/20 ARMs will work only as Patb indicated. The terms of my coworker appear to be better than is indicated above and may be the exception not the rule. If the interest rates stay low all the better.
For those that are saying in 10 years interest rates and inflation will be above 10%, you should be jumping at these deals and the banks (Government) will be taking it in the short again.
Lucky In OC
4plex,
The other thing I forgot to mention on low LTD or LTV ratios, it looks favorable as well. It's an investment tool for some and not home purchasing tool for everyone. I am in the first category and can pay off my home if I want. I am looking at better safe return on my money.
Lucky In OC
4plex,, Congratulations. You got lucky.
I'm not going to waste my time explaining the facts to an obvious mortgage expert like you.
"You got lucky"
and the harder I work, the luckier I get