I hate being right sometimes. BusinessWeek’s cover story this week is about Toxic Mortgages; it discusses the problems with Option ARM loans. As I’ve been saying for a few years now, too many people got sucked in by the premise of outstanding rates to help them purchase homes they simply couldn’t afford.
Now, all of a sudden, everyone is talking about it. Where were the publications and the politicians back when this all started? Busy, I guess. The market has topped after years of irrational exuberance, and as you can read from either the Business Week article, or from one of the many housing bubble blogs, things aren’t looking good.
Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
Lets take a look at how risky things are (click on map to enlarge):
Florida, Arizona and Washington state have an average of 10-15% of new and refinanced mortgages in the form of ARMs — Nevada averages 20-25% — California averages 25-30%. More astoundingly, “through Mar. 31 of this year, at least 51% of mortgages in West Virginia . . . were option ARMs.”
Worse yet, “Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments. Most of these borrowers aren’t paying down their loans; they’re underpaying them up.”
What does this mean? It means there is a massive percentage of the American population that will likely be facing foreclosure very soon. It means that many hard working people have put themselves in a terrible position because the lending industry is not completely regulated. It means that we are, without a doubt, on the verge of a crisis of unbelievable proportions.
Call me whatever you want, but for the past 3 1/2 years I’ve been warning my friends and family that this would happen. A few listened and locked in 30 year fixed loans . . . a few simply couldn’t afford to buy property (we’re in SoCal after all) . . . a few heeded my advice (very few) . . . and a few are now, like many others, in serious trouble.
I wonder how the new bankruptcy reforms will affect this impending situation.
We’re about to find out!