1) ARM resets will be an issue. I disagree with the person who said that a large group of people will get 25-50% pay raises before the ARM adjusts. Number 1, there are very few people who become doctors each year, a bit more become lawyers and engineers. Secondly most of them have enormous debt from school. Here is a quote that I pulled from an article yesterday, “A look at the economy today reveals that in real terms, hourly and weekly wages are slightly down since the beginning of the recovery in November 2001, and real median family incomes dropped each of the first three years since 2001.” Doesn’t look like a lot of people are getting large raises these days. In fact, I would argue that the people who have done well recently are real estate agents, lenders, appraisers, builders, etc. not because they are brain surgeons but because they were in the right place at the right time. As housing goes, so goes the economy.
2) Almost no one thinks about where their ARM might end up. I mentioned before that the easiest sell for a lender is to say, “oh you will either move or refinance before your ARM adjusts. This is a load of hogwash, but everyone wants to believe it. 1) If rates have gone up, how is the person going to refinance? 2) If the real estate market is falling how will the person sell their house without taking a beating? People hear what they want to believe.
3) Ok, my company sells the loans to wall street in MBS (mortgage backed securities. Many people invest in MBS, in fact, you and I could if we had an investment in a mutual fund that invests in mortgage securities. I believe that both China and Japan have been heavy buyers of MBSs which has helped to keep rates somewhat artificially low. I do believe the risk has been underestimated in these securities and someone will pay the price. Also, on a tangent, I believe that the credit scoring models are a huge potential issue because they have never been tested in a downcycle. Who is to say that people with 700 credit scores will be able to service their debt in a recession? The credit scores are looking at past data that does not include a real estate downturn.
