1) The ARM reset question is a good one. I have seen people get in trouble to where they can’ t refinance because either they have no equity or they don’t qualify. Imagine someone who qualified at a 45% debt ratio. If rates went up at all, they can’t qualify for a standard loan unless their income shot up which is unlikely. Now, they could still get a stated, no ratio or no doc. But the rate will be higher than a full doc loan. Plus if they don’t have the equity they are finished regardless. I think we will see this being an issue for all the people who got 100% financing in 2005 and maybe some who took out 100% loans in 2004. If they don’t have the equity they will be in trouble. Bottom line, I think that the ARM reset is a potential issue. It really depends what rates do over the next 2 years. Its possible that the FED panics and cuts rates again as housing crashes and the economy crashes. If this is the case, many people will be saved. However, some will still have the equity problem and this will prevent them from getting a loan. If rates were to stay where they are or increase even just a little, watch out, it will get very ugly fast. This whole housing bubble was based on very low rates, and interest only ARMs, if rates go up people will get wiped out. Remember that when a rate adjusts, assuming the ARM is based on the 1 year t-bill, you add a 2.75% margin to it. So people who can’t refi will suffer. I think this will be a problem, and it will all depend on what the FED does over the next year. Also, one huge thing to remember, the FEDs rate increases take from 6-12 months to have an impact we haven’t even seen the effects of the latest rate hikes yet. There is much more pain to come.
That really depends on the type of loan one is doing. I was in a high priced market, but usually my max loan might be $650k – $800k once you go over $800k people usually have private bankers or some start paying cash. You could just take the 45% debt ratio and back into the income needed. Remember that a lot of people will use stated income, no ratio or no docs if they can’t afford the home. This leads to a funny thing I heard from a realtor. He said that at an open house in this neighborhood where the average house costs $1.5M or more, the women coming through the house were neighbors. They were complaining that their ARMS were going up and that they had to turn off the AC and the lights on the 2nd floor. These are people in $1.5M homes, no one is immune, in fact people in that bracket who relied on 4% ARMS are in big trouble.
Before 1999 I rarely did a cash out. People just did not use their home as their piggybank. I read the other day that cashouts were at the highest level since 1990 or so. This is a signal that people are living on their equity and when this dries up, due to declining prices, they will be in big trouble.
I never really worked with seniors too much. Most had either a pension or social security. They were usually conservative. So they would be safe. The ones I worked with took 30 year fixed rates and put 20% or more down. Again, I didn’t work with too many. Now, I know that some had problems with the annual tax increases.
I know my company kept data on loan performance, but I was not privy to it. I would watch the foreclosure rate and remember that it is a lagging indicator. The foreclosure rate has been artificially low because of the appreciation of the last few years. I have read that the subprime foreclosure rates have really jumped which makes sense. Many of those people should not have been allowed to buy a house.
The lenders have data on CLTV. Yes, remember that the two loan notes will be recorded separately and may be from 2 different lenders. So I agree that some of the LTV data is probably very flawed because its not catching the 80/20, 80/15/5, 80/10/10. In my area we have been doing these loans since 1997 or so. I almost never did a 95% or 90% with MI unless the 2nd wouldn’t get approved. I think the 2nd trust lenders will get killed as the market turns. I read the other day that the investors on Wall Street have already repriced (raised the rates) on the 2nds because of the greater risk.
I never saw a lot of global investors in my area. I know they were out there but my contacts weren’t working with them. I think what we will see is as all the housing markets slow worldwide, which is happening, their will be less global investors for the US. Note that the UK just raised their funds rate by .25% 2 days ago and so did Australia. Both of these markets are already hurting.
My bank is a very conservative large bank, (top 3 in volume). They will be fine because they do other stuff besides mortgages, they are very diversified. Other top banks who don’t have diversified businesses will be hurt much more. I didn’t’ t notice any tightening of guidelines at my bank, however, many banks are. I know that WAMU and Countrywide tightened the Option ARMS initial qualifying rates. Also, many subprime lenders have tightened or dropped risky products altogether. In fact, some subprime lenders are already going out of business or being merged.
