Posted on 09/14/2006 5:54:44 AM PDT by Hydroshock
Because the mortgage industry doesn't measure itself month over month, Instead we look at month over same month last year. There are serious fluctuations in mortgage origination volumes month to month and July is typically a down month due to vacations. August is usually one of the biggest months of the year but August 2006 saw a substantial drop in volume indusrty wide vs last year.
ROFL! Great graphic!
You are quite correct, but I tend to look at these things in terms of loan to value at any given moment. If your property is losing value due to a down market but you are paying down the principal on your loan at the same time, the LTV is less likely to go out of whack. The notable implication in the housing market is the availability of home equity credit.
I don't see how an interest-only ARM, by itself, leads to negative amortization.
Sorry the sentence I wrote was not entirely clear. I'm not saying IO's lead to negative amortization. Only Option ARMs. Both lead to resets where the monthly payment jumps, usually after 5 years. Payments on IOs can jump 50% or more after resetting a new interest rate and then to begin amortizing on a 25-year loan schedule.
interesting, as July 2003 was Country Wide's (at the time) largest funding month in their history.
Because after the initial period of interest only, usually five years, the interest adjusts and the borrower starts to pay interest and principal. Most formulas would give borrowers a higher interest rate even if interest rates had not changed (based on a short-term rate plus a margin, often 2 percentage points or more). The principal addition to the payment is based on amortizing the loan over 25 years instead of 30, since no amortization occurred in the first 5 years. With a higher interest rate plus a principal payment when the loan resets, payments can jump 50 percent or more. If home prices are flat and falling the borrower can not refinance out of the loan to keep the payment low with a new IO or some other loan.
I think more and more are getting mortgage loans from credit unions, instead of the typical mortgage outlets. Interest rates are lower and they don't stick you with ARM loans or fluctuating loans. We have our mortgage through an insured credit union.
In five years, I will make $6,956 per month. This comes only $45 shy of the worst case 50% mortgage increase you predict. I can still afford the mortgage.
The odds of a home's value decreasing over 5 years is pretty minimal anyway.
You are right, of course. However, higher interest rates could put a strain. In some areas where labor markets are weak, the homebuyer could be unemployed. One of the reason IO loans are riskier is that the borrower is qualified for the mortgage based only on the interest payment and not on the fully amortized payment. Obviously lenders consider the risk manageable, as your example indicates. The test for IO loans will be how much higher delinquencies and defaults will be in several years after these loans have aged.
I concur that their is some additional risk, but I disagree with those who say any particular type of loan should never be used. I really really really disagree with those who want the government to outlaw any particular type of loan.
I was offered a job there in January. Thankfully, my intuition to not take the job was correct.
100% correct.
It’s not the loan programs, it’s WHO is using them and HOW that is the problem. Interest only, ARMs in general, and Option ARMs especially were once reserved for the people that were savvy investors who were risk tolerant and could afford to be that way.
When people started doing them for “the masses” to be able to buy a $500k home on $60k in income...the problems arose.
Good, like I have said I do not wish this on anyone. But it promises to be a wild ride for the time being.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.