Remember the S&L debacle? Everyone says that the downturn of 1990 was caused by defense cut backs. That’s partly true. The S&L scandal did that too. It was a confluence of events. Defense cutbacks, S&L debacle, correction in the market, the Japanese repatriating their money, caused the bubble to burst in SD. In 1980’s the deregulation of S&L industry caused cash to flood the market thus creating a bubble. Today, the exotic mortgages are doing the same thing.
In 1990 Boston, NYC and other markets crashed as well. They did not not have large defense contrators like San Diego, but the had the S&Ls.
A bubble is born whenever new sources of cash are available. It’ll be uglier this time around because RE is what is proping up the entire economy. Think of all the markets where RE is overvalued.
“They get another two- or three-year hybrid with a low introductory rate to keep payments down,” said Frank E. Nothaft, a vice president and chief economist at Freddie Mac, the mortgage buyer. “They’re trying to put it off forever, which is O.K. as long as interest rates are low. But when they start to spike, then it’s going to be more problematic.”
For now, this mini-refinancing boom is assuaging fears that rising interest rates and higher monthly payments would drive some borrowers into foreclosure or force them to scale back sharply on other spending. As a result, consumer spending may hold up better than some economists had thought.
But the refinancing also represents a doubling-down on a bet that housing prices will continue to rise on the West and East Coasts and in other hot markets. If the value of the home falls closer to the amount of the loan, that could curb the ability to refinance, and may prompt the homeowner to either invest more in the home or to sell it.
Still, borrowers like Mr. Perry say the loans make sense because in a few years they plan to move to another home, earn more or refinance again, often using the same assumptions they made when they took out their earlier loans”.
Mr. Perry lives on the East Coast, where home values are still rising. You won’t see a mini refinancing boom here, because homes values have fallen, and banks won’t lend you more than the home value. Mr. Perry also must have used stated income or had a 50% raise, because today’s ARM refi borrower needs 50% more income to afford a 50% higher payment at today’s rates.
Nice try, murray, but your’re tangoing with the wrong person. I actually know what I’m talking about.
