Re-refinancing, and Putting Off Mortgage Pain

[PerryChase]

New York Time article.  Click link to view. 

It is the latest twist in the gravity-defying world of the high housing prices and exotic low-rate mortgages: As monthly payments on adjustable-rate mortgages are starting to balloon, many Americans have found a way to put off the day of reckoning.

They are refinancing with new adjustable-rate mortgages that keep monthly payments low — for now, that is, though their payments are likely to rise even higher in the future…..

Maybe the pop will have to wait a little longer.

[PerryChase]

Notice the story of Mr. Perry (not me) I wonder what kind of financial planning he’s in.

Quote from NYT Article:
With his new loan, his third adjustable-rate mortgage, Mr. Perry, a former technology project manager, cashed about $200,000 out of his home’s equity and is investing it into his four-year-old financial planning business. “I could have sold my house and made my family move,” said Mr. Perry, 42, who lives with his wife and a 3-year-old son in Danville, about 20 miles east of Oakland. “But I didn’t do that. I said, ‘Look, I want to start a new business,’ and this product allowed me to do that.”

[DaCounselor]

If his business ends up making him a ton of dough, it will be a great parlay. If it fails, maybe not such a great move. Who knows how it will play out?

[powayseller]

I read this story yesterday and wanted to start a thread on it. The only reason that Mr. Perry could refinance with an ARM, instead of being forced into foreclosure, is because home prices are still rising in his market. So he had the equity to qualify for a new loan.

In San Diego, with home prices falling, I would guess that all 2005 and most 2004 buyers cannot refinance because they lack the equity. Also, rates are so much higher today, that you need the higher income to qualify for the higher rate. I guess Mr. Perry’s current income is high enough, or did he go stated?

I really wish we had a mortgage officer in our forums. We need it badly.

[FormerOwner]

I think the nature of the lending and appraisal process may keep the refi’s going for a while longer. Appraisers are hired by mortgage brokers (in many cases) who get paid when loans fund. If a loan doesn’t fund, neither the mortgage broker nor the appraiser gets paid. Guess what, the house will appraise at the value needed for the loan to go through. I think the banks are aware that a lot of these loans will not be repaid but they don’t care since they sell the loans to Fannie Mae and Freddie Mac and make a nice profit on the transaction. Even for the loans that the bank keeps, they can count of the government bailing them out when the loans start going bad so as not to disrupt the banking system. The ultimate underwriters are the TAXPAYERS but we have no say in whether these types of loans get funded!

Also, when you think about a bank funding a loan based on someone barely qualifyiing at a “teaser rate”, the bank knows it is highly likely that the borrower will default once the teaser rate adjusts to a market rate. They don’t care. Same goes for stated income loans. The banks are making money on these loans knowing a lot of them will default. The only way out of it will be for the government to print more money to bail out the banks. The resulting inflation will be equivalent to a tax on the US population.

In the end, this can only go on for so long and eventually, you are right, people will NOT be able to refi and there’s no way the numbers can be massaged to make it work. People won’t even WANT to refi since their debt will be > than their home’s value. That’s when the house of cards will fall. I don’t think we’re too far off from that; it’s starting slowly. Some people still have some equity when the inflated appraisals are used so that’ll keep SOME of these refi’s going for awhile. As far as the income part of it, maybe some of these loans are using low teaser rates and/or stated income.

[Bugs]

Even as we speak a lot of refinance applications are being denied for lack of equity. There’s a lot more scrutiny of loan applications right now, and that includes scrutiny of the appraisals in those application packages. Just in the last week I flagged several unreasonable appraisals in review, and in each case meaning that application was denied by my client (the bank). Now if those borrowers want to get a loan they have to try and hang their applications on a less vigilent lender. Some of them might succeed but others probably won’t. I can tell that for many of these borrowers everything is riding on getting the new loan.

As the rejection rate goes up, so does the level of scrutiny on the deals they do fund. The lenders might not want to tighten up but they have no choice as evidence mounts that the markets are in decline.

As I have been saying for the last few weeks, the passing of July 1 marks the end of using yr2005 sales as comparables in appraisals, so now appraisals are coming in lower than they would have even just a couple months ago. There’s no escaping this trend. The market psychology is shifting quickly. I seriously doubt that lowering the interest rate would stop it at this point.

[FormerOwner]

Oh, and I still don’t think homes are a good investment right now. Once the house of cards fall and the govt bailout of the banks takes place, long term interest rates will rise and lending standards will tighten, putting further downward pressure on R/E prices. We’re still a number of years away from a “good value” in R/E.

[PerryChase]

Refis will delay the day of reckoning for some years. So it seems to me. From the article, it sounds to me like homeowners who are having loan resets, can refi at yet another teaser rate and delay making higher mortgage payments for a while — another 2-3 years (since values can still arguably be considered up). In 3 year however, when statistics clearly point to a down market, they won’t be able to kick the can any further.

So my guess it that we won’t see the bottom of the market for another few years, 2010-2011?

[powayseller]

Bugs, you and Rich have talked about the psychology of the market often, and I wonder if you could explain that with regard to possible lower Fed interest rates. Wouldn’t lower interest rates provide a stimulus again?

Perry, I think this market can keep going down until the last of the ARM holders is forced into foreclosure, which would be 2011 for someone who got a 5/1 ARM today.

[Author]

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