Interest Only Mortgages
Our discussion of Interest Only Mortgages this morning was incomplete without an accompanying graph.
Here is the accompanying map from NYT:
click for larger map
Thank to the NYT for their invaluable assistance.
>
Source:
Keep
Eyes Fixed on Your Variable-Rate Mortgage
DAMON DARLIN
NYTimes, July
15, 2006
http://www.nytimes.com/2006/07/15/business/15money.html
Monday, July 17, 2006 | 02:00 PM | Permalink
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thot foiks in Boulder had more sense
Posted by: scorpio | Jul 17, 2006 2:08:38 PM
It is interesting that this is a smaller percentage than those adjustables being underwritten in 2004 and 2005. This map will get darker as the years progress.
Posted by: Gary Anderson | Jul 17, 2006 2:13:52 PM
Hey Pete..... any idea on AK's numbers?
Posted by: saltwater | Jul 17, 2006 2:19:51 PM
I expected higher percentages on the coasts and in pockets of fast growth, but what's in the water in Atlanta?! Hotlanta is going to be Brokelanta.
Posted by: ElamBend | Jul 17, 2006 2:45:36 PM
Saltwater: No idea. Salaries in AK are well above the natl avg, taxes are very low (no state income, no sales tax except within some city limits). So I would expect less than natl average of exotic loans.
That said, home prices here (Fairbanks) are ridiculous, roughly equal to what you would pay in pricier parts of Seattle or Portland, but for inferior products. So there is a potential affordability element. I just haven't seen any data I can recall on our market.
Barry: Looks like you got linked by one of the giant political sites again..."Atrios". He also linked to you a couple of days ago. I'd be curious to see what your traffic stats look like after he links compared to normal traffic.
Posted by: Alaskan Pete | Jul 17, 2006 2:56:11 PM
S'up with all the Santa Bankruptia in Cally?
Posted by: epoh | Jul 17, 2006 2:56:57 PM
FYI, not all interest only loans are adjustable rate or variable rate. I should know, I have an interest only option and it's a fixed rate at 6.0 for 30 years. Therefore the data cited above might not be worth much depending on just what you're trying to get out of it.
Posted by: Steve Goulet | Jul 17, 2006 3:11:32 PM
It's true that IO and ARM loans will put pressure on home prices in the future. But I think the underlying pressure has to also be measured, and that underlying pressure is what % of monthly income is going toward mortgage payments.
For example, I know of a few individuals who could have paid all cash for their homes, but chose to take advantage of the ultra liquid rates. They understand that in the near future they will need to refi and will be comfortable in doing so. This is in contrast to someone who is 100% LTV who takes out an IO/ARM and doles out a large portion of their income to monthly payments.
So the true underlying debt/income burden has to be taken into account. We can't hang everything up to the fact that IO/ARMs are bad bad bad and mean crash crash crash.
Posted by: Michael C. | Jul 17, 2006 3:16:41 PM
are these 1st or second (vacation, investment) homes? does that matter?
Posted by: jon | Jul 17, 2006 3:52:10 PM
this graph doesn't tell us if these ARM's are 3, 5, 7, or 10 years, so it is hard to tell just how many loans are coming up soon, and how many are further out there.
Posted by: Joe | Jul 17, 2006 4:05:21 PM
There is nothing wrong with interest only or other types of "non-conventional" financing. This type of financing is bullish.
Bullish not just on the housing market and economy, but also bullish on the person who assumes this loan.
A borrower in their mid 30's to early 50's is in his/her prime earrning years and expects to increase their income not decrease it every year. So, it is a positive sign.
Persons on fixed income and elderly should not accept this type of financing.
Posted by: Massimo | Jul 17, 2006 4:14:59 PM
There's nothing wrong with this type of financing becoming more common. There is also nothing wrong with mortgage delinquincies and foreclosures rising...it's all part of a cycle...or call it something else if you have an aversion to the word cycle. Just like there was nothing wrong with the S&P 500 trading at 44 times earnings in Q1 of 2000.
I don't think anyone is saying that anyone in particular is in over their head. However, the increasing rate (and increase in the rate of increase) of these mortgage products are reflective of a populace that, in my opinion, is myopic where rates/unemployment/economic prosperity is concerned.
Oops, that's leading me right back to that whole cycle thingy again.
Posted by: CDizzle | Jul 17, 2006 4:41:42 PM
This data , while "factual" is (negative) hype. What gets no press in these debt avalanche articles, is the obvious step these debtors will take when "teaser" rates rise -- you re-finance to another "teaser" rate. There is plenty of cheap credit available...you just have to look. How many 0%, 1 year credit card offers have you gotten this month?
American comsumers will slow down...but won't collapse, imho.
Posted by: ss | Jul 17, 2006 4:59:53 PM
ElamBend - Atlanta has a high degree of people that move in and out - live there for short periods of time so this type of financing may have been more attractive in Atlanta.
Michael C -The people you know that could have paid cash are in the extreme minority.
Joe - Most interest rates are locked only for the first couple of years and then reset annually with a fixed cap on how much they can rise each year - usually 2%.
Massimo - I hope you are being sarcastic - If not the future will prove you wrong.
I spent 5 years recently as a corporate controller for a large homebuilder (with an in house mortgage company). I could write for a week describing the how much trouble many people are in for. Many people try to explain things away and that there will be a soft landing. I can promise you it will not be soft. It will vary by location but it will vary from bad to worse. Have you not wondered how all these people can afford these huge homes that are being built? Creative financing has gotten out of control and lending standards have become non-existent. People do NOT look at the prices - they only care about the payment - this is the key to understanding why people have gotten into this situation. People are trying to get the most house they possibly can afford and were getting 3% interest only loans to do it (some even negative amortization loans) now over the next couple of years that interest rate will reset a couple of times to lets say 6-7%. That means more or less the mortgage payment will double! Most of these people were stretched to get in with the original payment. There is no way most can afford the new mortgage payment. This will 1 - slow the economy tremendously. 2 - greatly increase the home on the market which will 3 - push prices down and it will take years to digest this so they will not bounce back quick. Finally think about who is holding the mortgages..... It is not who you think .... Many have been sold off by the mortgage companies in the form of collateralized bonds. The buyers have been mutual funds and pension funds - be careful what is in your bond fund. In addition look closely at your money market .... Does it hold "US Bonds" ... sound secure doesn't it ... but look closely it likely refers to Fannie Mae Debt ... which are all these mortgages that are out there .... This is not secured or guaranteed.... if there is a wave of bad debts these money markets could lose principal! I really feel bad for the old people that have their savings in what they think is a safe money market account living on the meager interest and then they may very well lose a significant portion of their principal unless uncle sam bails the whole thing out which would be ALOT more than the S&L crisis. I will end it here but I could go on and on and on.
Posted by: jab | Jul 17, 2006 5:06:50 PM
Jab,
No debtor intends to sit back and let their mtg double. Mtg brokes/banks will be fighting tooth and nail for the re-finance business. You may not like the "mtg kiting" idea, but it makes sound financial sense. I would also like to see more data on actual debt service coverage on Americans. I suspect it's a whole lot less in comparison to the nintey's.
Oh, and long term rates have peaked!
Posted by: ss | Jul 17, 2006 5:28:19 PM
ss,
"Oh, and long term rates have peaked!"
How did you come to that conclusion? Or are you being facetious?
Posted by: C-Money | Jul 17, 2006 5:55:39 PM
SS:
Debt service as measured by the FED's "Financial Obligation Ratio (FOR)" is at all time high levels. The mortgage component therein is already at an all time high level before the onslaught of ARM re-sets.
Additionally, the PCE (personal consumption expenditures) as a % of disposable income, is at 50 year highs.
Mail me some of that good weed you're smokin, partner.
Posted by: Alaskan_Pete | Jul 17, 2006 6:15:57 PM
C-Money,
I come to that conclusion from many fronts. Technically, the 10 yr yield has held the long term downtrend dating back to the '95 peak.
Next look at what the "adults" or smart money is doing. Looking at the Commitment of Traders we clearly see the "commercials" (smart money) have been VERY long bonds...to the tune of several standard deviations long. My money is on them. Bears have been arm waving about 6+ % rates for years....and have been wrong.
Next look at any of the leading economic indicators. ECRI's FIG (future inflation guage) and Indusrtrial Production indicators are falling, since Feb.
Q.E.D....rates have peaked, imho.
Posted by: ss | Jul 17, 2006 6:16:46 PM
SS: I'm not quite sure that I'm following your logic. If the rates are adjusting higher because the market rates are higher (because the Fed rate to banks are higher is higher), then I would surmise that the clamoring of the mortgage bankers might be dampened a bit. There's also a matter of the underlying value. If the housing values are dropping and the LTV ratio on the old loan was high, there might be a small problem qualifying for a loan.
I think that it is fair to say that with rates rising and home values flattening--that to expect the consumer to continue to belly up to the consumption bar and order 24 oz beers is optimistic. I think that the consumer will still order beers, but they will be 12 oz. beers,
JAB: Great comments.
There was this terrific article over at the Prudentbear.com. For any wanting another view of consumer debt and net worth and what that might mean, I recommend this article.
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=55383
Posted by: Leisa | Jul 17, 2006 6:18:31 PM
Petie...my boy.
And where is net worth, on a 50 year look.
Yes, at record levels.
Here's the FOR data...it is up ~ 2.9% since 2000. It has been rising since they started keeping track in 1980...This is your argument?
http://www.economagic.com/em-cgi/data.exe/frbfor/FOR
Spare the lame Cheech & Chong humor please.
Posted by: ss | Jul 17, 2006 6:27:21 PM
Leisa,
You make a fair point on LTV. I'm not suggesting there are not individuals out there that aren't stretched...the marginal players that buy anything at the top (leveraged) will get burned. I'm saying these gloom and doom articles data mine to suit their stance/argument/book. It's RARELY as good, or bad as it looks. These guys like prudent bear have predicted 50 of the last 2 crashes.
The consumer will slow down...but won't collapse. What we need to discuss is the more important Corp spending...Cap Ex....Corp balance sheets have NEVER been healthier (thanks to the Re-Patriation Act of last year). They will pick up the slack of the comsumer, imho.
Posted by: ss | Jul 17, 2006 6:36:28 PM
Pete:
Check your facts on the PCE (just for the Halibut):
http://www.nasdaq.com/econoday/reports/US/EN/New_York/personal_income_and_outlays/year/2006/yearly/05/index.html
Posted by: ss | Jul 17, 2006 6:47:18 PM
ss, your a mumbling fool. They are NOT going to pick up a "consumer" slowdown, because those "healthy" numbers themselves are going to fall.
Denial hurts man, your pathetic show is over.
Posted by: Cherry | Jul 17, 2006 6:52:37 PM
ss, i disagree the corps will pick up the consumer slack. the housing market has appeared to of hit a wall a couple of months ago, at least here in the NE. consumers drive most of the economy. when they stop puttin up and decide to shut up, everything else will go.
you quoted net worth has never been higher? how much of that has to do with housing stock?
Posted by: Richard | Jul 17, 2006 6:55:03 PM
SS: I've heard this refrain about corporate purchasing power filling in for the consumer--and I believed in it for about 60 days. Today, I'm a skeptic.. Capex projects get the ax as soon as corps get a whiff of smoke in their customers buying habits. I'm not trying to argue the point, but I merely point out that the refrain doesn't make much sense to me (and I say that from a financial executive perspective). I'd also note that coporations have been spending their hard earned cash in propping up their stock price by buying stock. I'm taking a wait and see approach, and I don't pretend to have any special knowledge. But with all of the forecasted softness, you can bet that some hard-scrapple CFO is going to be culling through every capex project and nixing those that are discretionary as opposed to mandatory.
Posted by: Leisa | Jul 17, 2006 6:55:39 PM
