Government official dismisses ARM concerns

[powayseller]

quote from a SF Gate article

Jared Bernstein, senior economist at the Economic Policy Institute in Washington, D.C., said rate hikes, while unpleasant, are unlikely to be the tipping point that pushes anyone into bankruptcy.

“Sure, if you’re teetering on the edge, higher loan repayments are the last thing you need, but usually it’s bigger, more cataclysmic events like a divorce, loss of a job, serious illness especially in the absence of insurance” that forces people into bankruptcy, he said. “This is more an impingement on living standards. It just makes it more difficult to get ahead.”

Economists say higher rates can prompt some people to trim their outlays on discretionary items such as eating out. So far the people interviewed for this article say they haven’t made significant cutbacks, covering extra costs in other ways.

The consumers most likely to feel the impact, Bernstein said, are those with adjustable-rate mortgages.

“A lot of the ARMs are starting to adjust,” he said. “When those terms end and they need to be reset, mortgage rates are going to be a percent or two higher. You’re talking about a few hundred dollars per month and as much as $1,000 or $2,000 more per year. This, in a climate where family incomes have been flat relative to inflation and people are getting pinched at the pump. When you look at a few extra hundred dollars going out the door, that’s going to pinch.”
END QUOTE

This guy is nuts. An adjustment from 4% to 6% is a 50% increase in payments, not just a 1% – 2% increase in a mortgage rate. And the cost to most households can be $800/month. The lady featured in a Georgia foreclosure story saw her payments go up $600 per month (or similar).

[masayako]

Ignorant sellers + ignorant government economists = oh my goodness. Put the seltbelt on, brothers.

[powayseller]

Here’s an even better story about a banker. The branch manager at World Savings in Rancho Bernardo, when trying to allay my concerns about keeping my CD there, told me that ARMs were nothing to worry about.

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 rate. Your $2,000 payment would go to $3,000 if your rate changed from 4% to 6%.”

I think he got it. I hope he reviewed his mortgage details.

The only worse thing was the low-cut shirt worn by one of the lady tellers. Whatever happened to professionalism and competence?

[Dougie944]

What is the address of the bank where the lady wears shirts that are cut too low? I need to check out this rampant unprofessionalism first hand.

[carlislematthew]

I don’t think he’s nuts. A lot of the stuff we hear is *national* commentary. Most people in the US just don’t have anywhere NEAR 600-800K in mortgage debt. They often say “things will be OK” and then temper that with “some overheated markets may experience problems”…

[powayseller]

Here’s a part of the story I was referring to in my post, about the lady in Georgia.

This lady’s mortgage went up 40% since the beginning of the year, and will go up again in December. The story doesn’t tell us the value of her mortgage, only that she refinanced into an ARM in 2003.

The Texas homeowner purchased her first home in 2003 with a $141,000 mortgage, and saw her payments jump 36% earlier this year.

carlislematthew, the guy is clearly nuts. I knew about the national ARM problem, and he, as a professional, should know more than I.

I hope that everyone reading this post is clear about the nationwide fallout of the nationwide lax lending standards. The bubble areas are regional, but the lax lending was nationwide, and thus will cause housing prices to drop nationwide. Even $100K homes can be foreclosed on if the owner has an ARM. ARMs are toxic. Anyway, here are some quotes from the reuters story.

“As more hybrid adjustable rate mortgages adjust upward and housing prices dip, many Americans can’t refinance out of this squeeze. They are finding themselves trapped in too-high monthly payments, and some face foreclosures.

In 2003, Anita Britten refinanced her two-story brick cottage in Lithonia, Ga. using a hybrid adjustable rate mortgage, or ARM. Her lender reassured her that she could refinance out of the riskier loan into a traditional one when her interest rate started to reset.

Three years later, Britten can’t get a new mortgage and her monthly payment has jumped by a third in six months.

Britten’s monthly payment jumped from $1,079 to $1,340 at the beginning of this year. It rose again on June 1 by another $104 and is scheduled to increase again in December. Britten, who is also paying off student loans, went to a credit counseling service to help her avoid foreclosure.

“I’ve gotten rid of all my credit cards and I’m not supposed to refinance for another year,” she said. “All I can do is tread water right now.”

When Dora Angel of DeSoto, Texas bought her first home in 2003, she paid $141,000 for the brand new three-bedroom, two-bath home. At the time, her mortgage payment was $1,400 a month.

DeSoto originally thought that she had a fixed-rate loan. But about five months ago, she noticed that her monthly payment kicked up to $1,900. She only made the monthly payments by sacrificing payments on her credit cards, which pulled down her credit rating.

Now, DeSoto can’t continue paying $1,900 each month, but, because of her credit ranking, she doesn’t qualify for a fixed-rate mortgage.

END QUOTE

[Lickitysplit]

Would someone please detail equations on how a loan with a $2k monthly payment goes to $3k monthly if the rate goes from 4% to 6%? Using Bankrate.com’s mortgage calculator payments on a $420k 30yr loan goes from $2005.14 @ 4% to $2518.11 @ 6%. In order to hit $3k a month the rate would have to go to almost 8% ($2995 @ 7.7%). Looking at these three datapoints it seems that rate increase may be related to payment increase by a 2:1 ratio. Was this a generalized comment that exaggerated the rate increase effect or is there something I’m not catching?

[EJ]

I think the monthly payment would exact follow the interest rate if it were an interest only loan. For example, $2k in interest per month would be $3k in interest per month in the rate went from 4% to 6%. However, I think I/O loans also add principal payments when the rate resets so this is not a realistic example.

The 30yr fixed and the traditional ARMs include some principal payment, so if you are paying $500 towards principal and $1.5k towards interest and the rate increased from 4% to 6% this would make your interest payment $2250. So your total mortgage payment would increase from $2k to $2750.

Someone please correct me if I am misunderstanding this. Also, this made me think of a question. Towards the end of a loan the principal is the majority of the payment, would this alter (lessen) the effect of a rate increase? Or is this all factored in at the conception of the loan?

[Anonymous]

You are correct on the interest only loan – for the payment to increase from $2,000 to $3,000 a month on a 2% interest rate increase the loan would have to be a $600,000 loan.

There are a lot of moving parts in today’s mortgages and some of the IO’s, as you point out, begin to amortize upon the passage of the IO period. This can be a double whammy as the interest adjusts and now the loan needs to amortize over the remaining term. There are exceptions to almost every scenario.

An interesting thing about home loans is that the lower the rate more of the payment goes toward principal reduction (except with IO loans) so a loan with a lower rate actually sees more principal reduction in the initial years of the loan than a higher rate loan. On an adjustable, all things being equal, the interest rate (after caps are taken into account), remaining term and outstanding balance are used to calculate the new required payment.

[powayseller]

EJ, you’re right. I’m not a loan officer, so I was giving vague figures. The principal stays constant, so the effect is actually less than 50% on an ARM, but more than 50% on an IO loan that starts into its principal-repayment period. Many ARMs start out with low teaser rates, at 1%, and then go to 5%. So while my numbers were inaccurate, the general gist is that your payments can go up a lot, up to 70% actually, depending on the loan you have.

Considering that people tend to get the highest payment for which they qualify, a move from $1500 to $1900 is huge. Although many of us would scoff at a $1900 payment, imagine your income after taxes is $3K/month, or $2800/month, and now your payment went to $1900. That is enough to cause a foreclosure.

Sorry that I didn’t run the numbers. Accuracy is important to me, and I should have verified before I posted.

[powayseller]

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.

Has anyone stopped to think about this? I’ve never heard it put in those terms. Just $1 trillion of loans. But never in terms of the number of people. Or the amount of increase.

[fuggy]

In the 70s there used to be assumable mortgages and those were very popular. Am I correct that no loans are assumable today?

If so, in the last few years all these brilliant home buyers just looked at the monthly payment on their fixed $500,000 30-year loan when they bought. But Joe Homedebt must move every 5 years.
No future buyer can assume his way-low-interest mortgage.

Therefore, oops, the actual home price and not the monthly payment had been the important thing to consider before purchasing.

Notice how at Realtor.com they calculate the “monthly payment” for you so you are suckered into ignoring the home´s price?

fuggy

[LA_Renter]

Just giving these guys the benefit of the doubt still spells massive problems down the road. Even if there is not one foreclosure as a result of these ARM’s resetting you are still going to have 5 million people whose monthly payments are going up. They pointed out many will not be able to go out to eat as much, or for that matter purchase furniture, or take that vacation, or buy that new car, or…..etc etc etc. Areas of the country such as So Cal where you have a higher percentage of these types of loans will be hit hardest in their local economies. You are right Poway Seller the numbers are staggering. I try to keep an open mind listening to advocates of a soft landing. More and more their arguments sound like empty rhetoric.

[powayseller]

I calculated that 5 million number, because no one has ever said how many people were affected. It could be much less, or much more.

My number is based on $200K average loan amount. In CA, the loan amount would be higher, probably $500K (median price), so perhaps nationwide we would have only 2 or 3 million people affected. Does anyone want to improve my estimate?

[Author]

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