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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: nextrade! who wrote (24509)	10/13/2004 9:40:41 PM
From: nextrade!	Read Replies (1) \| Respond to of 306849

In five years, today's ARMs may drown housing market 08:53 PM CDT on Sunday, October 10, 2004 By DANIELLE DiMARTINO / The Dallas Morning News dallasnews.com How risky is your mortgage? Most people think of a home purchase as a smart, stable investment. But hundreds of thousands of Americans may be setting themselves up for big losses. According to the latest Mortgage Bankers Association report, the share of adjustable-rate mortgages ticked up last week to 34 percent of new mortgages – this at a time when interest rates are near historic lows. And a tidbit in The Wall Street Journal last week said that more than one in 10 new mortgages is interest-only, in which the borrower can delay principal payments for five or 10 years. Throw in a little insult: The article said these interest-only loans were "typically" adjustables and are being aggressively hawked to subprime borrowers. I was so disturbed by this that I asked Craig Jarrell, president of Pulaski Mortgage in Dallas, to walk me through a scenario in which a borrower took out one of these "hybrid" loans to purchase a $200,000 home. Let's look at a five-year, interest-only, adjustable-rate mortgage, with no down payment – not atypical these days, unfortunately. The mortgage rate on such a loan, if taken out today, would be about 5.25 percent. After five years, principal payments kick in, and the loan's interest rate moves up or down with the market. Mr. Jarrell crunched the numbers. The lucky borrower walks away with an initial mortgage payment of $875. That's a lot of house for very little money! At least that's how I imagine the spiel. The next assumption is based on a conservative look into the future. Let's say five years from now, mortgage rates are at 7.5 percent, their average over the last 10 years. The last time they were so "high" was 1997. An economic recovery could get us there. Or foreign banks could stop subsidizing our Treasury market, triggering a decline in the dollar and a rise in interest rates. The point is, interest rates are so low that either a good or bad economy could produce higher rates in the next five years. What's inconceivable is that rates fall materially from today's levels. At the higher interest rate, after the five-year interest-rate lock is released and the principal begins to be amortized, the payment almost doubles, to $1,436. (This is excluding property taxes and insurance.) Obviously, the situation unravels further if interest rates rise further. The mortgage brokers who push these products, and who question my intelligence and/or motives via e-mail every time I write about them, say the loans are perfect for people who plan to be in their house less than five years. But if the hordes of people taking out these hybrid loans stick to the game plan, we'll be witness to a flooded market five years from now. If the one in three borrowers taking out plain-vanilla adjustables joins the party, it'll be a drowned market. "What's going to happen in five years if everyone goes to sell their home, if their home's value hasn't risen and if their income is the same? There are just too many 'what ifs' that could go wrong," Mr. Jarrell said. "The honeymoon would be over, and no one would be going anywhere." If you've purchased one of these loans, your mortgage payment could double or, if you can't deal with that, you could be forced to sell your house at a loss. Of course, you can be optimistic if you want. Surely all the other borrowers in your shoes plan on staying in their home for the full 30 years. That way, you'll be free to sell into a strong market.