Doomsday Coming in October For The Subprime Mortgage Industry

Many consumers who signed up for adjustable rate mortgages in 2004 and 2005 will see their mortgage payments jump this October, according to CNNMoney. With foreclosure rates already as high as one foreclosure filing for every 656 households in the US, this can’t be good news.

From CNNMoney:

“In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.

So, what exactly will happen to the more than two million homeowners whose ARM’s will reset in October?

A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1,331, a 39 percent increase.

The chief economist for the Mortgage Banker’s Association estimates that about 600,000 of these homeowners will get into trouble, and about 300,000 of them will lose their homes. How did this happen?

“There were increasingly poor quality loans made starting in the spring of 2005,” he said, “with the poorest of all made during the fall of 2006.”

Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets (“liar loans”) and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched

For an insider’s look at the shady techniques subprime lenders used to foist ARM loans on unsuspecting people who did not know they couldn’t afford them, check out this story from NPR about mortgage lender Ameriquest.

Scary, scary stuff.

Mortgage resets: Record bill coming due [CNNMoney]
(Photo: mbostock)
PREVIOUSLY: Ameriquest Employees Confess: Lying To Customers, Forging Papers

Comments

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  1. anatak says:

    Ohhhhh, ARMs! ARMs are great! What a valuable financial tool. What a great idea – Lets go buy a house we can’t afford when rates have never been lower and get an adjustable rate that is guaranteed to go up.

  2. alpha says:

    @anatak:

    “But surely we’ll be making more money then and will be able to afford the payments!!!” they say. Yeah right. You haven’t figured out how to save. Hell, you haven’t even figured out how to NOT overspend, so any raise you did get is shot to hell by all the crap you buy.

    Good riddance to the people that dumb, though I might add that anyone that was truly “taken advantage of” by the lenders (and I don’t doubt that it happens…occasionally) still gets a bit of sympathy from me.

  3. surfacenoise76 says:

    Schadenfreude time!

  4. tentimesodds says:

    Chicken Little telling us that the sky is falling. Idiots who bought more house than they could really afford will lose their houses. Lenders who were stupid enough to lend to them will lose money or go out of business. Investors dumb enough to buy mortgage-backed securities based only on subprime loans will lose money. The world will go on.

  5. dbeahn says:

    So in other words, I want to wait to buy until AFTER October when the market gets even worse for sellers.

    SCHWEET!!!!

  6. foghat81 says:

    @tentimesodds: exactly. and I say this living in a suburb of Cleveland, which just happens to be one of the hardest hit cities along with Detroit. I feel bad some people are gonna be in trouble, but on the whole, it’s not enough to kill our economy as some have predicted.

  7. kamel5547 says:

    I have little pity for many of these borrowers. I worked doing FHA refinances in the 2002-2004 period and the borrowers were asking for loans that made more sense. We would refinance people into 5.5% fixed at a very minimal cost (no points or fees as we got paid by selling the loans to Countrywide, they did get stuck with PMI for an additional period of time though). They’d come back 6 months later saying they wanted a 4.5% ARM… little we could do besides tell them it wasn’t a good idea and then refinance them if they insisted. A lot of them couldn’t afford the payments even at 5.5 or 6.0 fixed, and shouldn’t have been in the property at that point.

  8. dbeahn says:

    @foghat81: I’m not going to apologize for not being stupid enough to take the highest mortgage I could afford at a rate that is only locked for 2 out of 30 years so I could buy a home at a highly inflated price.

    I was smart enough to wait for the inevitable market crash that always comes when homes are WAY WAY over-valued and being built at an insane rate.

    Sucks to be the people that were stupid, but they could have been smart, and chose not to be.

  9. howie_in_az says:

    @anatak: you forgot to blame the industry instead of the people, silly!

  10. alpha says:

    @dbeahn:

    That’s what I plan on doing…and by then the combination of my earnings + people trying to offload their houses (and failing in many cases) should make for an interesting array of homes that I’ll be able to afford (without an ARM…)

  11. The sad thing is that a lot of people who were sold subprime loans qualified for better (cheaper) loans but were not offered them because the broker made more money from subprime loans.

    Finally, I can’t for the life of me understand what some of these people were thinking when they signed up for these mortgages.

  12. Lewis says:

    I’d like to know please where my cookie is.* I bought a house at the top of the market in 2005 (unintentionally stupid) but didn’t do an ARM (smart) nor did I buy more house than I could afford (smart.)

    I pay my bills every month, because I didn’t get in over my head. So where’s my cookie? No one thanks me for paying my bills (unless you count “CR – THANK YOU” each month on my mortgage statement). No one writes articles about what a good boy I am for paying my fucking bills when others don’t.

    *TM Chris Rock

  13. JohnMc says:

    All I can say is, they were/are adults. Nobody forced them to sign a contract for that mortgage. They voluntered for that.

    This is shining example of why Democrats say that we need to ‘protect’ people from themselves. Poppycock. Adult living is risky. Plan accordingly or pay the consequences….

  14. JohnMc says:

    Alpha,

    Only if the rates don’t go up as a reaction to the meltdown….

  15. nucleotide says:

    What really irks me it dishonest loan brokers. I constantly get spam from countrywide trying to get me to re-fi my 6% fixed loan to an ARM. I wonder how many un-savvy morgate shoppers get fooled by this crap. It’s sick that countrywide is hawking loans that are detrimental to their customers interests.

  16. webothlikesoup says:

    So, it bothers me that ARMs are being ruled as a stupid move for everyone. Yes, lots of dumb people were given loans by dumb/predatory lenders. But . . .

    ARMs can be a pretty smart move in the right location and the right market. There’s risk, sure, but if you’re planning to move within a certain timeframe, ARMs can be an acceptable risk and a good investment tool.

    We’ve lived in our condo for 3 years. We are 100% financed, paying interest only. 80% is a 5/1 ARM at less than 4.5%, and the other 20% is an equity line of credit at around 7%. No money down. I think we even rolled our closing costs into the equity line of credit.

    We could have financed a regular 30-year mortgage, but our mortgage agent, who we’ve worked with quite a bit in the past, showed us the 5/1 ARM numbers, and we figured we could put the hundreds of dollars per month we would save to better use than paying down a loan on a place we knew we would leave sooner rather than later.

    We knew there was a good chance our incomes would increase, allowing us more cushion in our budget in case we stayed past the 5 years. All for less on a monthly basis than we had been paying in rent.

    We’re selling our place, and after realtor fees, we’re walking away with just over $100,000 in our pockets. And I’m trying to figure out how I’m stupid. Actually, I’m not. I don’t care. I have 100k for essentially paying rent on a place.

  17. schvitzatura says:

    @ foghat81:

    Bill Kunstler has a few things to say on the subject…combined, one-two punch, with collapsing petroleum production and the sub-prime abyss will send more people and American, in general, over the edge; excerpt from his 4/2/07 entry, “In the Zone”:

    The more interesting point in all this, for the moment, is that the media has still not put together the collapse of the housing bubble and the permanent oil crisis. These events will be happening simultaneously. The housing industry, so-called, will never recover because the oil crisis spells the end of the suburban build out. The cycle is over. The big production homebuilders will go down and never come back. We won’t need any more retail, either. We won’t be building anymore WalMarts and Target stores, and the thousands now running will die off just as the giant Baluchitherium of the Asian steppes crapped out in the early Miocene epoch.

  18. eightfifteen says:

    Anyone know a publicly traded foreclosure company?

  19. alpha says:

    @JohnMc:

    Dammit man, don’t ruin my dream!!!

    No really though, that’s a decent point.

  20. silenuswise says:

    @webothlikesoup: Eh, smart, lucky, whatever. The point is that anyone sitting on property in this moment faces a looming danger: 1) if you have an ARM and you’re not ready to sell, you’re about to get fucked when your payments balloon very soon; 2) if you are ready to sell, you’re about to get fucked when your 2006-inspired asking price gets laughed at in the current cooling market. Every morning on the way to work I pass by the same two houses for sale–one originally for $950,000, the other originally for $480,000. Now they’re asking for $875,000 and $365,000, respectively. One year has already passed… still unsold.

    It’s like watching a thrilling movie, but without having to pay admission. Anybody got any popcorn?

  21. bohemian says:

    I can see how someone who is a young noob or uneducated might be suckered into these loans.

    The last two times we were house shopping since 2003 I got the hard sell on this from realtors who obviously had something to gain by pushing people to certain brokers selling these loans.

    I kept being told how great these were and that I just wasn’t saavy enough with finances to understand what they were offering me. No thanks, I will stick with the good old 5% 30 year fixed the bank had.

  22. webothlikesoup says:

    @silenuswise: Yes, we were a little lucky. But it’s not like heading to Vegas and throwing it all down on one hand of cards. It’s about doing research, seeing where the market is headed, and figuring out what acceptable risk is for you.

    To your other points:

    1. Agreed, but those people are stupid or suckered or both.
    2. On the price points changing in the market . . . again, those people sound borderline stupid, but you don’t say how much they have mortgaged. They still could be sitting on a large profit, and they’re willing to wait out the current market. They also could be, to your point, fucked. You may not know which movie you’re watching.

    If we had sold last year, I’m sure we would have an extra $20k. But we didn’t. Big deal. I still made out just fine.

  23. Peekaso says:

    15 year fixed please?
    Thank you.

  24. quagmire0 says:

    If people didn’t spend beyond their means and buy houses that they can barely afford with a low interest rate, this wouldn’t effect them much. I bought a cheaper townhome in 2003, got an FHA ARM and ,finally, next year the rate will be higher than what a 30 year mortgage is today. Looking back, I should have gone with a 30 year, but hey, I can handle the increase because I am LIVING UNDER MY MEANS.

  25. Ausoleil says:

    People may or may not be living under their means but the end result for many solvent people is that after their ARMs increase, they cannot save money in a their rainy day funds. That leaves them susceptible to financial glitches at which point they have to rely on credit to get through. When that happens, the credit vise gains its nasty grip.

  26. Frank Grimes says:

    @webothlikesoup: I’m with you. I knew we would probably be in our current home for 3-5 years so we did a 5/1 ARM w/ an 80/10/10 split. Locked in 4.75% on the 80% and 6.75% on the 10% and put 10% down. In Houston there was no bubble to speak of, just good, steady, unspectacular 6-10% growth for most neighborhoods. ARMS are a GREAT option for you if you know you aren’t going to be in your home for a long time. The above option got me out of PMI and all the interest is tax deductible and we have already begun looking for a new home and will probably move in 18-24 months. Well before the loan re-adjusts in three years. The closing costs are a little higher but maybe $500 total. I would and will do it again if I can.

  27. dbeahn says:

    @webothlikesoup: I don’t think anyone is saying an ARM is a stupid move – people ARE saying that a lot of people signed for STUPID ARMs. My sister got an ARM with a really low rate for 4 years, then converted to a fixed when the market started to shift. That’s a smart way to use an ARM.

    You also sound like you made smart decisions along the way, and because of that an ARM was a good choice for you.

  28. Sudonum says:

    I’ve used ARMS. I’ve used Fixed. It depends on the property and the market and how long I’m planning to sit on it. I have yet to lose money, or “live beyond my means”. They are both financial tools. Like any tool, you’re success with it depends on how you use it.

  29. webothlikesoup says:

    @dbeahn: I think we completely agree on the use of ARMs and that some of them are stupid, but I do think all ARMs are getting lumped into the same “stupid” category. And that includes some of the comments on here whenever the sub-prime meltdown is discussed.

    What is concerning is the lack of understanding of financial tools and the ability of the media (not Consumerist, obviously) to differentiate between flexible and stupid. Nuance is hard to communicate, but it’s the people who are losing their asses to stupid ARMs that needed to understand nuance (and some basic investment principles) the most. Telling them, though, that a 30-yr fixed that they won’t qualify for is the only way they can own a home isn’t helping them either. ARM = BAD isn’t true (and we know that ARM = GOOD isn’t true either). Home ownership is one of the best investments around, if you know how to do it in a smart way.

  30. Trai_Dep says:

    “If only people would buy a house within their means then…”

    Clearly this is said by flyover-state people. You can’t touch a rehabbed crackhouse one half block away from LAX for under $350,000 in these parts.

  31. alpha says:

    @trai_dep:

    so rent. you can afford that right?

  32. fulcrcle says:

    I have a dream….so do a lot of other people who were suckered into ARM’s. I was lucky I turned down anything other than a fixed rate mortgage. Not everyone wants to continue to live inan apartment and they were offered by some shady person an oppertunity to have a dream home. They took it and didnt realize at the end of they day they were handed lemons with no water to make lemonade. Stop calling people stupid. It’s unbecoming of intelligent folks like yourselves who will never lose their jobs or fall on hard times

  33. j-o-h-n says:

    @trai_dep Nobody is holding a gun to your head making you live in So.Cal, are they?

    (*gloating from flyover land*)

  34. @j-o-h-n: *joins the gloat*

    Does everybody have those friends who bought the “best house they could afford” (usually with the excuse “we wanted to be in the right school district” although there always seem to be cheaper houses in that district than the one they bought) who have literally zero furniture other than, like, beds?

    I have those friends even in flyover country. :)

  35. crankymediaguy says:

    “This is shining example of why Democrats say that we need to ‘protect’ people from themselves.”

    As opposed to the Republicans who say that crooked and greedy corporations need to be protected from suffering the consequences of their illegal actions.

    Can YOU say “Enron?” I knew you could.

  36. silenuswise says:

    @webothlikesoup: Good points, but this statement you make I think is part of a larger problem at the core of the housing mess: “Home ownership is one of the best investments around, if you know how to do it in a smart way”. In the mid-late ’90′s, people jumped on the mutual fund and dot-com bandwagons, expecting pay-offs, and trying to “time” the market. After the dot-com crash and market sag in the early aughts, the same thing happened with real estate: home ownership was the new “best investment”, and irrational exuberance found a new place to thrive.

    In short, the idea that home ownership is one of the “best investments” is a recent bit of propaganda with very little historical precedent. Is it a “good” investment? Well, that’s relative to a number of factors. Emotional, for one: many people like the idea of owning a home. Financial? Well, outside of speculatory housing bubbles, most people in the past have owned a home for the long haul–not to turn a profit. If your goal is a secure financial return, and you missed the bubble, then buying a home is *not* necessarily one of the “best investments” you can make. And we are now beginning to see yet another fallout from that attitude with waves of disclosures.

  37. gibsonic says:

    @dbeahn:

    so in other words for people like me trying to SELL, we need to drop the price now and get a buyer while the getting’s good(or at least not as bad as it’s going to get)

    this sucks really bad. we’ve considered selling for about the last 2 years and then due to a job change that allows me to work from home we finally made the decision…right as all this sub-prime garbage hit the fan.

    Anyone looking for a great 5 year old home in the Midsouth area for under $150k? 1400 sqft, nice yart etc?

  38. samurailynn says:

    @gibsonic: If the job allows you to work from home just put the house on the market and sell it for it’s worth to you when it happens. Don’t rush into a sale, and maybe be willing to rent for a while after you sell in order to find the house you want in the location you want.

  39. matt1978 says:

    gibsonic:

    Do you mean the Memphis-Arkansas-Mississippi area?
    I hope not, because you will be waiting a while.