Broken ARMs
July 10th, 2007 at 4:16 pm
So maybe those subprime mortgages weren’t such a hot idea.
CNN reports today that more than two million homeowners nationwide with subprime adjustable rate loans will see their mortgage payments spike in the coming months. That means busy times for the repo man.
That could have series consequences in Texas. McAllen is the national capital of subprime loans. Nearly 27 percent of the city’s mortgages are subprime loans — tops in the nation, and ahead of places like Memphis and Miami. Brownsville, the No. 6 subprime market, ain’t far behind.
Subprime mortgages have been a drug for the housing sector in recent years. Mortgage companies cater these loans to buyers with bad credit or low incomes. They lure buyers with low, introductory “teaser” rates for the first two or three years on a 30-year note. After that, the mortgage rates become “adjustable.” And by adjust, we mean increase. A lot.
For instance, as CNN notes, a homeowner with a $200,000 ARM at an interest rate of 4 percent for the first two years would see the mortgage payment jump 39 percent (from $955 a month to $1,331). Many subprime loans from 2004 and 2005 are set to spike this year, which could result in a glut of foreclosures.
The industry argues that these loans are useful if the buyer refinances into a more stable, fixed-rate mortgage within the first three years — a kind of stepping stone. But there’s increasing evidence that many buyers don’t know what they’re getting into. And that mortgage lenders have used subprime loans to shoehorn homebuyers into houses they couldn’t afford, setting them on a path for foreclosure.
July 12th, 2007 at 9:02 pm
Dave, the real story here is the fact that major investment banks (Merrill Lynch, Citi, Morgan Stanley, Lehman Brothers, Credit Suisse, Bear Stearns in particular) acquired stakes in rival subprime and nonconforming lenders, then pulled their warehouse lines (or funding) from other lenders. The reason for pulling warehouse lines - or enforcing loan buybacks - was poor underwriting. As planned and predicted, the competitors folded. Now there are fewer players in the market to compete with the investment bank subsidiaries. Even more important in the strategy - or the accidental windfall - is the fact that underwriting guidelines have tightened. That means that when folks with ARMs in general, option ARMs and “teaser” rates go to refinance in a more restricted credit environment, voila - where they were once “near-prime” borrowers, in the new underwriting criteria they are now sub-prime! What does that mean for borrowers? A difference in higher rates from 1.5 to 3 points. What does that mean for the investment banks? A “new” crisis refinance market of an estimated $2.8 billion. Accidental consequence or not, this situation has not even seen the worst of it yet. Unfortunately, Congress doesn’t have a clue on how to deal with it, and of course the investment banks are far smarter and faster than the regulators anyway. This is the tip of the iceberg, The Texas Observer should dig just a little deeper and get the whole story - it’s much bigger, and far worse than anyone thinks. And ultimately, it’s the little guy who gets hurt with foreclosed property - or for those of us who thankfully can pay, it brings down our own house prices.