b33,
That is exactly what I was wondering. What were rates in 2003-2005. If I remember right, they were hitting 5-5.5% fixed. So sure, if he got a 5.75% ARM and today it goes to 5.8, who cares? But why would he take that ARM when he could get a fixed for that rate and lock it in for 30 years? Is it more likly that his inital rate was 1.75% and now it is going 5.8%? How is that any different (minus better borrower) than a 6% subprime going to 10%?
So what Joe Alt-A did was get a ARM at historical lows, and apply the difference from a fixed payment to get more house. Now his pretend payment is going up to a real payment, still at great low rates, but putting that morgage out of his affordability range. He would refinance, but the bank has dropped that product, denying him the out he was counting on, especially since he has little to no equity and likely no savings to speak of.
Barring a huge pay increase, government intervention, or someother windfall (stock options etc.) Joe Alt-A is in no better place than a “James Subprime”. He still used temporary interest rates to over extend himself on the bigger house that he could not afford with the expectation that appreciation and refinancing would save him.
Ok, so I overspoke in my post. Imagine if 50-60% of buyers in 2004 walked instead of 80%. RE would still be screwed.
