I actually used a $200K figure in my July 6 post, where I explained the problems with resetting loans:
” This story has an example of a 50% increase in payments.
I forgot that the going ARM rate was 3.5%. A $300K loan at 3.5% had payments of $1300. They will go up to $1800 to $2100 this year. This is the $1 trillion of resets they keep talking about. It’s the glut of 3/1 ARMs, made at very low rates 3 years ago. If each ARM is $200K average, that’s 5 million people whose mortgages will increase, mostly at 50% increases. That is a huge deal. 5 million homeowners will see their mortgages go up 50% next year. ”
If Americans lived below their means, or saved more than 5% of their income, I would say this is not a problem. However, national data is showing that the personal savings rate is negative, wages have been flat for at least 5 years, and borrowers are spending 35% – 45% of their pay on mortgages. This doesn’t sound like a society that can easily take on a 50% jump in mortgage payments.
Lenders used to qualify borrowers based on their abiilty make the maximum capped payment, but a few years ago they started qualifying people on the initial teaser interest rate. That’s why those loans are more risky now.
The branch manager at my bank, World Savings doesn’t even understand that his loan can reset. How does that bode for Joe Sixpack? Here’s the conversation:
He said, “I have an adjustable rate mortgage, and my payment hasn’t gone up. Why do you say they go up?”
My reply, “That’s because you haven’t hit your adjustable period yet. Your 4% rate can go to 6%”
He responded, “But that’s only a 2% increase”.
I tried again, “It’s a 2% increase in the rate, but a 50% change in the payment. Your $2,000 payment would go to $3,000 if your rate changed from 4% to 6%.”
He: “OOOOOhhhhhh……..”
Woodrow, what assumption would you use? How many borrowers can handle a 50% , 70%, or 100% increase in their mortgage payment?
