Irvine Housing Blog

“and lying about their residency status as well”

You mean to tell me that undocumented workers (a.k.a. illegal immigrants) have infiltrated the prestigious field of real estate?

No, not that, I’m referring to principal residency for the sake of lower rates and cap gains exemption.

“Most high end buyers finance with ARM loans.”

In other words, the foreclosure problem is going to be with us for a long time…

Not exactly. We’ll have problems with ARM loans and fixed loans that were structured between 2001 and 2007 that were NINJA loans. The problem isn’t one of being an ARM, but one of overstating income.

ARM loans have their place. Remember, the big “to-doo” about ARM resets isn’t happening at the scale it was projected to be, what with ARM indexes being as low as they are. The ARM reset problem are neg am loans where people paid the teaser and not the real rate, and again the NINJA loans that were offered to people who had no intention of paying them back.

High end buyers finance with ARM loans because they have a greater degree of risk tolerance and the assets to back them up if there is a problem.

The original discussion was of how high rate spreads are and how it will impact buyers. It’s never the rate, as people can still get attractive financing that isn’t a fixed loan. Why take a 7% 30 fixed when you can get a 7yr in the 6’s, a 5 yr in the 5’s, and a short term ARM in the 4’s? That is why high fixed rate loans are not going to kill the market. What will kill the market will be lack of down payment, McJobs, and ridiculous prices for starter homes. Will the high end suffer? Duh! The question answers itself. The problem loans failing today were not due to the rate, or the adjustment, but because of the lack of underwriting and documentary trail that would have prevented these loans from closing in the first place.

My additional .02

SGIP

I don’t think the ARM problem is overstated. It isn’t just the rate, it is the recast:

http://www.irvinehousingblog.com/blog/comments/the-arm-problem/

The reason you take a 30-year fixed is because it limits your interest rate risk. These low rates are not permanent.

The recast, yes. When you make a 1.0% rate payment in a 5.0% real market, the neg am is crazy. If you take a 4.% rate with a 6.0 margin, as many sub primers did, then yes the recast is going to hurt.

Rates may not stay low for long. We can agree on that. I funded loans in the late 80’s at 10% which people were happy to get after living through the early 80’s with rates in the teens. That said, look as 30 fixed rates over the past 15 years - averaging 5.5 to 7.5 - even for “common sense” ARM loans.

Could we see 10% + rates in the future, as we did during “late Carter, Early Reagan”? Will we have 12+ percent unemployment as we did then? Sure. Will we have stagnant wages? Sure. Will we have high inflation like we did then? Hmmm. Hard to answer. If we did ratchet up rates, who are the investors to buy these securities? Japan? China, The EU? Nope, they all have funding problems as well. So my contention is that rates could go up, as the sun does every day, but do we have a certain environment for higher rates? I don’t believe so, which means ARM rates may not be a bad deal compared to 30 fixed.

In the best possible worlds, sellers would need (compelled is my favored term…) to lower their prices to 1995ish levels before ARM programs become irrelevent.

I’d also favor abolishing ARM’s and standardizing mortgage loans as 30 year fixed products only, although again, ARM loans aren’t the problem - lax underwriting is. If ARM loans were to go away I’d expect prices to fall another 15 to 20% because very few people at these OC prices can afford to buy.

My .03 cents.

SGIP

Given the long-term ownership of a house, I think it is a near certainty that interest rates will be higher when people go to refinance in 5-10 years.

I agree with you fully that people using ARMs is the only thing preventing another 15%-20% drop in prices near term. I still don’t believe these are a wise or viable financing method for the long term.

I don’t know if you guys saw this today but this is the real problem with these arm loans—

www.businessweek.com
Investor Sues to Block Mortgage Modifications
A lawsuit against Bank of America claims states and banks will short bondholders $8.4 billion and damage the market by cutting home payments

By Mara Der Hovanesian
Related Items

The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.

The lawsuit , which seeks class-action status, was filed against Bank of America (BAC), which bought Countrywide in late 2007. It argues that most of the Countrywide loans are not Countrywide’s or Bank of America’s to modify, but rather are owned by trusts that bought them through securitization—the process of financing home loans through the public markets by parceling them out to investors.

Frey says that BofA’s modifications (BusinessWeek.com, 10/23/07) will short bondholders $8.4 billion by reducing borrower payments. While those loan adjustments may help to keep struggling borrowers in their homes today, Frey says those alterations run the risk of permanently damaging the secondary market for housing finance.

“I am an advocate for investors’ contractual rights,” says Frey, 50, in an interview. He has publicly argued since March that loan modifications (BusinessWeek, 11/26/08) are against contract law, and has threatened to sue banks—despite, he says, receiving pressure to back down from Washington. “Investors’ voices have been muted in this debate because they speak of an inconvenient truth: Current solutions sacrifice the long-term viability of this nation’s housing finance system for short-term political gain. No matter how noble the intent, it is not in the interest of the United States now, or in the future, to tell its citizens and the world at large that U.S. contract rights may be bent with the political winds.”
Bank of America Response

(There have been roughly $7 trillion in mortgages financed by global public markets since 2002, according to ThomsonReuters. Of course, not all of those loans are troubled.)

Today Ben Bernanke hinted at lowering rates another 50 bps. What we have is deflation even though the bankers want more interest out of homeowners Ben keeps on dropping the rates to where zero will match Japan’s. This is devastating for income retired folks who are getting next to nothing for their cash along with equities falling off a cliff here cash is being taken out at any opportunity.
As more 401k’s are drained more houses will go up for sale. Further job losses are going to put even more houses up for sale. The only way out is for decreased interest rates. So those homes get sold.

Interesting story—thanks for that.  Here’s a link for people who want to read it from “Bank of America Response” on:

http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db2008121_173068.htm?chan=top+news_top+news+index+-+temp_news+++analysis