Will Subprime Foreclosures Spread?

[justin]

I think the ARM repricing will be a bigger deal than subprime over the next few years. In the bubble markets at least. Folks who bought at or near the high point, who now will get stuck with payments that might double from the initial payments, but whose house has since decreased in value 5-20%.

I'm pretty sure I'll be in the market to refi my ARM in another year or so, depending on the interest rates.

[Alex]

Originally Posted by eridanus

Edit: Ok, I was remembering incorrectly. Half of all California mortgages in 2/2006 were ARMs, not subprime. Big difference. Thanks for the challenge, Alex.

Well, that 50% figure had me scared for a minute there!!!

the interesting thing about the subprime mortgage market is that the great majority of these loans go to minorities. I hope we don't see this taken to the point that we no longer have sub-prime mortgages available. Let's not throw the baby out with the bathwater.

I agree that ARMs could be a problem at some point, only time will tell. IMHO, mortgages are tools; used properly they can help create wealth, used recklessly you could lose an ARM (pun intended) .......................................... and a leg!.

Due to my personal circumstances, I've had a preference for ARMS over fixed rate mortgages. I've even used a neg-am loan to great benefit! A few years ago I had a NEG-AM mortgage. The payments were set very low and for the first 2 years of the loan, my teaser payment covered all of the interest and a part of the principal! Once the loan started to go into negative territory (about three years into the loan) I refinanced into another loan. Since I don't plan on living in my home for more than 7 years, I refinanced into another ARM with a seven year fixed rate. The payment is locked and the loan has no negative am. I choose to pay interest only and I invest the savings into a balanced investment portfolio. I've been able to increase my liquid accounts considerably over the last 3-4 years thanks to my judicious use of ARM mortgages.

To be clear, I am not saying that this strategy is right for everyone. Most folks would be better off with traditional 15 or 30 year fixed mortgages. It really depends on the circumstances.

[wabmester]

Some more optimism found!

LA Times link

Borrowers who have built up their stakes could help keep the U.S. out of recession, despite troubles in sub-prime lending, economists say.

(I don't think so.... )

[al_bundy]

equity can vanish in the blink of an eye. a lot of good neighborhoods in california dropped 30% or more in past housing busts

[Retire Soon]

There was an article in today's Wall Street Journal entitled, "Lending Oversight: Regulators scrutinized in Mortgage Meltdown." It seems that most of the subprime loans are out of the jurisdiction of federal regulators. Here's the breakdown:

52% originated by companies with no federal supervision

25% originated by finance companies that were units of bank holding companies,with only indirect supervision by the Federal Reserve.

23% regulated by banks and thrifts.

Thus, only 23% of the subprime loans written had direct supervision by the Federal Reserve. This may account for the fact that so many of them have been written in the past few years. In fact, even when the fed investigated complaints about these loans they, "shielded federally regulated banks from states and private litigants." It went on to say that the underlying belief is that too much regulation would stifle credit for low-income families. This philosophy is shared by the Bush administration.

Currently about 7 1/2 % of these loans are either 90 days late or are in forclosure. This is a pretty big number when you consider that 20% of the mortgage loans written in in 2006 were subprime loans.

Last fall federal bank regulators changed standards for these loans by requiring that the applicants qualify for the "highest interest rate" and not the "teaser rate." Under pressure from congress this month, underwriting standards for these loans are under "new guidance." Ironically, the subprime borrowers now behind in their payments are more apt to go into foreclosure because of their inability to refinance because of the effects of this new lending "guidance."