Monthly Mortgage Rate Resets, 2007-2016

Credit Slips’ Adam Levitin takes a look into the possibly even grimmer future of the housing market. We’ll let him explain it because he’s smart:

…this graph from Credit Suisse is the most sobering thing I’ve seen in a while. Mortgage_rate_resets It shows that most of the interest rate resets ahead aren’t subprime, but are instead Alt-A and option-ARMs…

Alt-A is the category of loans made to consumers with FICO scores just above the subprime threshold. Option ARMs give borrowers several payment options, including making a minimum payment that does not even cover the interest that accrued in the last month. This means it’s pretty easy for an option ARM to end up underwater, even in a market where prices are holding steady. If real estate prices are dropping, it is even more likely that an option ARM will end up upside down, which makes refinancing near impossible. The bulk of the Alt-A and option-ARM resets are coming in 2010-2011. A lot of things could change before then. But we might just be seeing the tip of the iceberg in the housing market.

Do you think all those people will be able to afford their resets?

Is This Just a “Sub-Prime” Mortgage Crisis? [Credit Slips]

Comments

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  1. yagisencho says:

    I’m glad that I like where I live. It just sucks that the market has locked us in for the forseeable future (though thankfully at a low fixed rate). Here’s hoping that I can get our mortgage payments down far enough in time to weather the real storm.

  2. SarcasticDwarf says:

    Would help to be able to see the prior 10 years as well for comparison.

  3. Parting says:

    Bad news, bad news and even more bad news.
    Government already in a red bailing bad payers. Hopefully medium/good payers will stay afloat.

    Nothing like a domino effect to screw economy.

  4. the sky is falling, the sky is falling

  5. m4ximusprim3 says:

    Alright, I’m not afraid to be the dumb one. Can someone explain the graph for me? I’m too young and poor to consider a mortgage (at least, one not based on fairy dust).

    Are these the dollar amounts which the mortgage rates will increase by when they reset? IE, how much the total mortgage payments will reset by?

    If so, why is the line between subprime and the second wave (mid ’09) so clearly deliniated? Do the option-arm’s and alt-a’s have a longer period at the intro rate before they reset?

  6. m4ximusprim3 says:

    btw, if most of those option arms are already going to be upside down (and I have no faith in people paying more than the minimum), $10b in resets per year looks bad.

    Just sayin…

  7. m4ximusprim3 says:

    stupid no edit. per month, should have been.

  8. humphrmi says:

    @m4ximusprim3: They are the amount of existing mortgages that will reset for each category in billions of dollars of mortgage value. So, in late 2008 the Sub-prime class (green bars) of mortgages will peak at somewhere between 35 and 40 billion dollars worth of mortgages resetting to new rates during that time period. Then, the sub-prime mortgage reset rates will start to fall off, as primes, Alt-A’s, and Option ARMs start to head upward (again, in total dollar value of the mortgages resetting during that period.)

    There’s no such thing as a dumb question when it comes to understanding financial matters.

  9. secondgreatdepression says:

    Two key things about this graph (which I’ve seen on various sites for the last six months):

    1. This proves that in fact it’s not a “subprime crisis” at all. The media’s framing of the problem that way was deeply misleading. The basic problem is that people bought homes for values that were inflated by the largest asset bubble in history, values that were certain to collapse. Buyers believed the hype that “your home will only increase in value.”

    2. Much of this depends on where interest rates are at when the loan resets. If the rates in 2008 or 2011 are higher than they were when the loan was originated (in 2005 or 2006), which is likely to be the case, than this is a very bad situation indeed. If, somehow, the rates are LOWER – which is not likely to be the case in 2011, although it *might* be the case in 2008, then it won’t be so bad.

    Note that the rate that matters isn’t the rate that the Federal Reserve targets, but LIBOR – the London Interbank Offered Rate, which is set by the market.

  10. LeopardSeal says:

    @Petrarch1603: You must be the spokesperson for average Americans, and a good indication of exactly why the US economy is heading in the direction it is. I’ll give you a hint as to where that is, it starts with a big “R”…

  11. chrisbacke says:

    And at the end of the day, I wonder if anyone actually came out ahead… The banks are licking their wounds, the realtors are hurt by the downturn, the trickle-down effect ensures that many contractors, retail stores, etc. are hurt by people unable to afford anything beyond their mortgage…

    Who does this leave?

    Answer: the people to make their money when the deal closes, and has little or no financial incentive to ensure it’s a *good* deal – the brokers…

    I’m amazed they’re just NOW getting around to regulating that industry…

  12. humphrmi says:

    @chrisbacke: The sub-prime mortgages were securitized (which turns (say) a debt into (say) a tradeable security, like a bond) and then sold on the markets. Every security has two sides, a “long” (buy) side and a “short” (sell) side. You can long or short securities whether you hold a real position in them or not (e.g. day trade). So a trader could have, in theory, taken a short position on the securities that the sub-prime mortgages were converted into.

    In fact, several big companies took major short positions on securitized sub-prime mortgages; Goldman Sachs and one other big investment bank who’s name I forget made billions. That is to say, their investors and retirement funds that bought the shorts on the securitized debt made billions.

  13. iamme99 says:

    Note that these resets extend all the way into 2012!

    But rates being reset isn’t really the problem. The problem is – can most of people pay the increase when the rate resets? If so, then no major problems. Unfortunately, I think many will not be able to do so, particularly if the economy weakens and unemployment rises.

    If people can’t maintain their payments in increasing numbers, then this will lead to more houses being lost to foreclosure, thus increasing the inventory of houses, which will of course lead to a continuing and protracted decline in the values of houses not foreclosed on.

    Now, if you are an owner diligently paying your mortgage, will you want to continue to do so if your loan goes underwater (your house is worth less than the loan)? Maybe you will if you are 5% underwater. But what if you are 20%, 30% or more? I suspect there is some number at which people will just walk away from their houses. Call this collateral damage. This potential cascading effect could be much bigger than any mortgage resets.

    Japan’s housing market lost over 85% of its value from their high to low. Let’s hope the USA doesn’t suffer a similar decline.

  14. swalve says:

    Duh, don’t buy adjustable rate loans.

  15. basket548 says:

    This is in fact already being priced into the market – as Consumerist has noted, the big writedowns that are being made by the big investment banks is due to the fact that they think that the loans won’t be repaid. At this point, the question is not really when, but how much.

  16. basket548 says:

    big writedowns ARE due…yay grammar

  17. badgeman46 says:

    My question is why would anyone get an ARM when interest rates are so low. It can only go up! Thats called being retarded.

  18. m4ximusprim3 says:

    @badgeman46: because you’re getting a super low intro rate on traditionally low interest.

    The plan was to refi to a more stable loan before the ARM reset and put the amount the house appreciated in the meantime towards the home price.

    The problem is people who couldn’t afford fixed rate mortgages took out ARMs on houses they couldn’t in their wildest dreams afford, betting very heavily that an artificially inflated housing market would continue to grow. Now THATS called being retarded

  19. ARP says:

    I bought my Chicago house for 400k. I got a fixed rate for 80% and a piggyback for the remaining 20%. I borrowed 100% but paid closing costs. The rate on the piggyback is currently less than the fixed. My ARM doesn’t reset for 13 years. I pay extra on each payment. By the time my loan resets, I can refinance into a single fixed rate loan. If I can’t, I still have enough income available to pay the extra amount. So, I’ve done all the “wrong” things. ARM’s, 100% financing, etc. are like any other financial tool- they can be very useful if used responsibly.

  20. Chabooby says:

    I bought a condo in West Hollywood, CA in 1998 for 240k. I sold that for 360k in 2000 and bought a 3 bedroom house in Laurel Canyon/LA for 460k. I made a little money and sold that house for 730k. I took my earned income and house income and rolled it into a house in Studio CIty for 1 million in 2002. I held that for two years and sold it for 1.6 million. This housing market has been nothing short of an incredible way to make money until 2002-4.

    One day in 2003 the mortgage guy called me and told me I could get approved for a loan for 2.5 million. At that point I no longer understood the market and I got out and threw away the guys number. The problem is that people got greedy and the stupid free market jackasses would not regulate the mortgage industry.

    Now we have a huge problem in that a starter home in LA costs 1 million, which is way more than any starter salary can afford. If the only problem was sub prime then we would be okay. Its not. We are in for a huge letdown. People are going to get hurt badly and its only just begun. This market is going to go down over the next three years and bottom out somewhere around year 2000 prices.

    The only reason I was able to afford my houses was the subprime, arms, junk loans. I was lucky and got for good this past summer. I wish every one else was this lucky. All of the people like me are now out of the market. The potential buyer poll for a 2 million house is depleted. There are four houses for sale within 500 yards of my house and no one with the cash/credit to make a deal.

    The sky is falling. It really is.

    • Anonymous says:

      @Chabooby: Well stated. See
      charts of property values plateaued in ’05
      Financial meltdown to commence 2007.5 as predicted from The
      Solar Mortality Theory-
      which defines Modern Histoy since 1796 discovery of Vitamins & CowPox whence population explosion commenced. Every 3
      generations since we have seen major global socio-economic
      upheavals like Clockwork- 1860s, 1930s and Now. Sorry about
      that but its a Fact of Life we ignore, that to go on replicating
      like so many human-lemmings with multi-birth families ensures
      DeathRate has to increase as our traditional Final Solution.

  21. HooFoot says:

    Here’s an even scarier thought: the Baby Boomers are already starting to retire en masse. As they grow older, they will probably be looking to downgrade their empty McMansions for smaller/more affordable living quarters, nursing homes, and retirement communities. And as morbid as this may sound, how many properties will go up for sale when they start dying off?

    Based on pure demographics, the housing market is going to be f*cked for a lot longer than 2012…

  22. Thorny says:

    I don’t know anybody who got an ARM, and I am wondering what exactly the percentage of ALL HOMEOWNERS are actually in trouble. Is it 10% is it 1% is it 50%? You’d think from all the hype that it is a majority of people, but I’m quite doubtful that it actually is.

    I mean, think about it — a billion dollars is only 4000 homes if the average home price is $250,000. Even if over the course of a year 500 billion in loans are reset that’s 2 million homes. Fine, so if 3-4 people live in each home, we’re talking about 6-8 million people affected by this in a country of 300 million. That’s like 2-3%. And not all of these are going to be defaulting, right?

    In fact, the estimated value of the US real estate market is $10 Trillion dollars according to the Fed. So 500 billion dollars is at most 5% of all real estate. Why are we in such a tizzy over this? A means to distract us from Iraq?

  23. clevershark says:

    Pretty much as I’ve read elsewhere and privately warned people about over the last few months — the fall’s subprime ARM woes were but the tip of an iceberg that looms large over 2008.

    It’s very silly to think that this will only be a problem for a handful of million people. When someone loses a home, it has very real impact over the value of the other homes in the same neighborhood, as well as on the businesses that cater to homeowners (how’s business at your local furniture store?). Homeowners who live with this uncertainty are also hesitant to make other big purchases such as cars.

    More importantly however is the secondary effect on the market at large. The fact is that the credit pipelines have been running pretty dry recently so it’s harder to get a mortgage, not just for the subprime borrowers (who have been pretty much locked out of the market since the fall) but also for ordinary mortgage borrowers and also for people who borrow to start or fund a business. The billions in bad-credit losses have also led to some pretty spectacular losses in the stock market and 5-figure layoffs in the financial industry. That doesn’t really do anything to encourage investment (in fact that’s one of the big reasons gold is so highly valued at the moment).

    So if you don’t think that these ARM resets are going to affect much of anything, it’s because you’re not paying attention.

  24. tacticalchunder says:

    This is going to be a big, ongoing problem — there have been warnings already about rising defaults on Alt-A mortgages. If the number of foreclosures just maintains as a constant percentage of the total ARM resets, it will be bad because the total number of resets is set to double next year. All those houses will go out into an already saturated market, driving prices down further.

    I’d gloat about having been disciplined and sitting out the bubble market and on a pile of cash, but I’m too worried about what’s going to happen to the economy to be doing a happy dance.

  25. ludwigk says:

    I’m not a finance-oriented kind of person, but I’m very good with numbers. When I saw those ‘Quicken Loan’ commercials where they talked about getting a $500k loan paying something like $399 a month, I got a mixture of curious and worried. I’ve looked at some fixed rate mortgage calculators and knew that houses in that range were still well beyond my means.

    Basically, with those Quicken Loans, your principle went up by ~$1500/month, until they popped a few years down with another $100k of debt and a horrible interest rate.

    The things is these loans are useless. Anyone who would need ot defer payment this much could never afford the loan once it pops.

  26. mikeunwired says:

    Bulls and Bears make money. Pigs get slaughtered!

    Most people do not live by the ideal that they want to hear the truth. They want to hear what they want to hear.

    As someone that did mortgages for 23 1/2 years and bailed-out of the business in 2005 due to what I thought were unsustainable lending / borrowing / buying practices, I can address a few of the points made here from an expert perspective.

    First, the whole economy looses in this situation. But, each individual who was part of building this mess was really only interested in the immediate gratification of what was in it for them at the time they entered the transaction. Realtors wanted that commission “NOW”. Buyers wanted that house “NOW”. Bankers wanted to make that loan “TODAY”, Investors wanted that profit “IMMEDIATELY”. Few thought or cared about the future because the future always takes care of itself. The Realtor runs the show in almost all buying situations. If the other participants don’t satisfy the Realtor (make the deal close), they get blackballed and quickly go out of business in that Realtor’s sphere of influence.

    Second, ALL homebuyers assume their house will go up in value — like there’s a Constitutional right to appreciation. Realtors and Lenders add to and feed this belief because they truly believe it themselves — or at least feel they have to believe it. To say otherwise is heresy.

    Third, “IF” any participant in the homebuying process does offer a dose of reality, they will be shunned by the others and will have to get a new job outside the industry. Just ask a lender that says no to a loan or an appraiser who “under appraises” (aka correctly values a house). If you kill a transaction for a Realtor, you are out of business to the whole of their sphere of influence. Home inspectors that over analyze a house (aka find significant problems) get a reputation and quickly find it hard to get business referrals. Do what you’re told and you’re fine. After all, if you don’t tell them what they want to hear there are ten others lined-up to do it.

    Fourth, Loan Officers and their frontline supervisors almost all work on commission or a heavy bonus schedule. If you don’t make a loan work you don’t eat. If you sell a higher income loan product over a lower income product, you eat lower on the hog or not at all. Loan Officers will sell you whatever you’ll accept — they hope it’s the highest income product for them, not the lowest most stable product for you. They will also charge you the highest combo of rates, points and fees you will tolerate — and you will tell them it’s OK.

    Fifth, Loan Officers will lie to you and you’ll never know it. A famous lie is selling you a rate buydown by pricing in more points then are needed on a loan. Then, they call you and tell you the good news — they got that loan squeezed through without needing the buydown. However, they keep the points on the table and make an EXTRA 2.75% of the loan amount — that’s alot of your money they just transfered from your pocket to theirs. A successful Loan Officer is trained to make sure you part with as many of your hard earned dollars as is humanly possible.

    Sixth, there is NO SUCH THING AS NO POINTS / NO CLOSING COSTS. There is only one rate that’s passed down from Wall Street and all loans are either a buy-up or buy-down from that rate. Every state has closing costs, fees and such of some sort. A loan that touts NO Points or No Closing just builds them into the rate and / or points and / or servicing fee payment and / or yield spread premium. You ALWAYS want to ask for a preliminary HUD 1 and you want to review it with a disinterested third party expert for hidden fees / costs.

    Seventh, If you have to take a higher rate loan or risky ARM of some sort, you will always be told that you can refinance out of it in 12-months of so. This goes back to the idea that all houses go up in value all the time. Add that to blind overconfidence by the consumer and a whole team of cheerleading players in the process — you get what we have today.

    Eighth, Rates will do one of three things — go up, go down or stay the same. People feel they can will rates to fall when they want them to as if their personal form of hope has enough karma to force the markets into their personal submission. I call this the Everyone’s An Economist Theory of Borrowing. Rates will rise and fall — staying the same happens in between. They move based on the market forces — not the will of a hopeful homeonwer. AND, even if rates do fall, your loan is most likely designed to rise due to margins and caps. It’s like going to Vegas — the house always wins, and, you’re not the house.

    I could go on forever. However, I have a few points I’d like to close with:

    Based on the current trends in the economy, the mortgage product mix (as seen in the graph associated with the post) and other situational issues, we will probably see our economic environment move into a period of Stagflation. This will mean that rates will rise as prices on goods and services also rise. In this case, we will find it harder to make rising payments on rising mortgage rates. Home prices will continue to fall as demand drops. Trade-downs from aging boomers will accelerate into the first half of the 2010s.

    The demand for housing will rise as the current high schoolers graduate from college. The size of this group rivals the size of the baby boom in population.

    It’s going to be a rough five to seven years, but, all trends swing both ways and will do so again. It’s just too bad we never seem to listen to the lessons that those before us have gone through.

    • Anonymous says:

      @medic78: @medic78: @mikeunwired:
      Superimposed over the real estate market is a Fact of Life that
      defines Modern History. Based on The Solar Mortality Theory,
      sun-synchronized population growth states that every 3
      generations, every 66.6yrs, when the 4th arrives you have
      the Aged & Newborns, neither working, to put enormous
      socio-economic pressure on the middle 2 generations and this
      results in major, global, socio-economic upheavals happenning
      like ClockWork every 3 generations since discovery of CowPox
      cure & Vitamins in 1796. The years are 1860s, 1930s & Now.
      Read to understand.
      Root cause is overpopulation. Solution is to limit BirthRates,
      otherwise DeathRates will be our traditional Final Solution

  27. Landru says:

    @humphrmi:
    and
    @m4ximusprim3:

    The fear of asking dumb questions is what got a lot of these people into this mess.

    So by all means, folks, ask away!

  28. Erwos says:

    @mikeunwired: Stagflation, at least stagflation like you saw in the 70′s, is somewhat unlikely, IMHO. The economy has shown itself fairly resilient to oil price induced inflation thus far, and that’s after a massive hike in oil prices this year alone. All other indicators would seem to point to deflationary pressure, not inflationary pressure – especially if you don’t think the job market is going to suddenly pick up a ton of steam.

    The Nixon administration had a lot of screwed up structural economic policies, policies which sometimes make our current situation look almost good. I don’t think we’re in for a big recession in 2008, but I do think we’ll see slowed economic growth.

  29. medic78 says:

    My home is probably one of the few left that is “guaranteed to increase in value”. Hehe.

    I bought an ex-party house, for dirt cheap, and have been steadily working on it for just over a year. Sure, it smelled like wet dog and stale pot smoke, but once I got all the carpet out (and found nice hardwood floors) it’s ok.

    It has been a lot of hard work, but getting a story and a half 4 br house in a nice area for $85k is worth it.

  30. savvy999 says:

    @mikeunwired: That was an awesome post. If there was a ranking system on Consumerist that would get five stars or 2 thumbs or good tomato. Thanks for taking the time to write it.

    So the question I have for you– is there a way for people within reasonable means to use this coming slump to an advantage? During a recession, I plow money into the market to buy low, and pull back out when the times are good. How about real estate– would ’08 or ’09 be a great time to pick up foreclosed or distressed properties as rentals (or to sell off later)? Whaddaya think?

  31. FatLynn says:

    Someone asked earlier about ARM’s…lots of people take ARM’s when they do not expect to live there as long as the ARM lasts. If you are a yuppie, and you expect to sell within 5 years, an ARM may be a good idea. However, you are assuming that you will be able to sell (or refi) within 5 years.

    I know a lot of people with good credit and 50K+ salaries who decided to buy 300K+ homes on ARM’s in the last five years because they were certain that a) their home equity would increase or b) their salary would increase enough to cover the ARM when it re-set. Those assumptions may not come true.

    Rules of thumb:
    Do not finance more than annual salary * 3
    Keep total mortgage + assessment + taxes < gross monthly salary/3

  32. Keith_Indy says:

    Some great explanations on this thread.

    The crisis still comes down to greed and speculation, for the most part.

    Over supply of houses are going to cause home prices to fall.

    Hope is not a business plan, or a plan for personal finances.

    We did an 80/10 on our current house in July of this year, both fixed rates on the advice of our mortgage broker. So, there are still good guys out there if you look for them. Once we get over the hump of paying off what we did put on short term credit (appliances, and some building material,) we will be able to pay off our 2nd mortgage in 2009, 6 years ahead of schedule. Then we’ll be debt free except for our mortgage.

  33. Sian says:

    Boy, I’m glad I’m looking to buy in the next few years. This is shaping up to be a meltdown of epic proportions. I feel sad for anyone who has to sell now.

  34. JeffM says:

    Well this certain doesn’t motivate me to buy any sooner than my current target of 2012. With rent costing 3.5% of a houses value a year and interest rates around 7-8% for a jumbo and 1.25% for property tax looks like renting will make sense for some time to come.

    Others have said it and I’m tired of hearing it from the mainstream media… this is NOT a subprime crisis… I have many friends that earn buckets of money that are in goofy mortgages with tons of expensive toys that could definitely see a pinch when their ARM resets. I’ll stick to paying a simple $2k/mo in rent over shelling out $4.5K for a mortgage (after tax benefits)

  35. swalve says:

    @JeffM: THere are two crisises, and they are purposefully (or irresponsibly) being conflated into the same thing.

    1) Real estate price bubble popping causing people who over-borrowed assuming they would make it back in appreciation to lose.

    2) Banks making, and then reselling bundled subprime loans to investors without properly considering risk. So bank X buys a bundle of loans thinking they were going to make 8% on that investment. THEY then borrow money to invest somewhere else with those 8% loans as security. And so on. When the loans fail, the pyramid falls over. It’s the same thing that happens when the stock market crashes.

  36. Japheaux says:

    I think Obama will ‘change’ all of this just as soon as McCain tells him what the plan is.

  37. Anonymous says:

    Someone above said: “The things is these loans are useless. Anyone who would need ot defer payment this much could never afford the loan once it pops.”

    The purpose was to create ABC paper that the banks could offload onto the unsuspecting. This is extremely bad for the economy, and demonstrates why regulation is required.

    And as it turned out, the banks were forced to buy-back a lot of the debt. Apparently, they were too smart for their own good.

  38. bubby1124 says:

    Notice in 2012 it all goes down. 2012 will be a big year.

  39. moore850 says:

    news flash… if you take out a loan you can’t afford, you’re screwed. maybe not today, but eventually. And apparently, eventually is right around the corner now. I for one hope that they stop building houses for a while, we have so many empty mcmansions here that really can’t see the drive to put even one more down before the others are selling.