Alt-A Mortgage Disaster in 2010-2011
In a phenomenon that couldn’t be more ill-timed, tens of billions in Alternative mortgages are due to be reset in 2010-2011. Though not sub-prime, many of these loans are interest-only, those in which the borrower makes no payments on principle. Once reset, borrowers could have monthly payments 15-20% higher than today.
The Gamechanger
Just a few years ago, when real estate was liquid and homes were selling for more than the asking price, interest-only loans burst on the scene in what clearly demonstrated the market was in a bubble. Interest-only loans are just that, monthly payments purely on interest with the borrower owning 0% of the home whether he or she had been paying on the debt for 6 months or 60 years. These loans were popular with speculators and over-leveraged average borrowers alike, and allowed buyers to buy more than they could truly afford to.
Also, interest only loans were loved by the banking industry due to their frequently high closing costs/fees which generated huge front-end profits. A banker could make the loan, seal a 2-3% profit at closing, then go on to sell the loan to Fannie Mae/Freddie Mac and generate even more quick cash with no risk. Needless to say, the banking industry loved touting these loans to buyers.
How Interest Only Loans Worked
Most interest only loans weren’t to remain interest-only forever. Many were brokered so that the payments would be interest only for 3-5 years before reset to new interest rates as well as new payment terms. Often, at the end of the first term, the mortgage would reset to a conventional 30-year loan that would include some payment on principle. When the shift occurs 5 years after the loan was made, the payments would increase as much as 15-20% due to the fact the borrower was now paying interest plus adding a significant portion towards the principle of the loan.
The Deal with Alt-A Loans
As we already know, mortgage delinquencies are up over 250% from 12 months ago due mostly to domestic job losses and a weakened economy. When these loans are reset, monthly payments are sure to rise, creating more delinquencies and ultimately more foreclosures which many predict will further restrain the climb in housing prices.
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Mortgage Rates Fall To .01 Points Above All Time Historic Low June 13, 2010
The 30 year rate fell from 4.79 to 4.72 this week. This is the lowest point this year. The previous low was 4.78 reached two weeks ago. What is more interesting is that the all time low is 4.71 so just .01 points lower than current rates.
Looking at other rates the 15 year dropped from 4.20 to 4.17. The 5 and 1 year arms dropped from 3.94 to 3.92 (5 year arm) and 3.95 to 3.91 (1 year arm). These are all time lows since we have good tracking data for these mortgage products. So would it make sense to look at some of these other mortgage products since they are at all time lows? Personally I would still avoid the 5 and 1 year arm. Since mortgage rates in general are so low it makes sense to lock in for as long as possible. Below are rates from the weeks from May 13, 2010 to Jun 10, 2010.
Jun 10, 2010
30-fixed 4.72 15-fixed 4.17 5 ARM 3.92 1 ARM 3.91
Jun 03, 2010
30-fixed 4.79 15-fixed 4.20 5 ARM 3.94 1 ARM 3.95
May 27, 2010
30-fixed 4.78 15-fixed 4.21 5 ARM 3.97 1 ARM 3.95
May 20, 2010
30-fixed 4.84 15-fixed 4.24 5 ARM 3.91 1 ARM 4.00
May 13, 2010
30-fixed 4.93 15-fixed 4.30 5 ARM 3.95 1 ARM 4.02
Nov 26, 2009
30-fixed 4.78 15-fixed 4.29 5 ARM 4.18 1 ARM 4.35
So rates are one thing but it’s also informative to calculate mortgage payments. We took today’s rates and calculated a mortgage payment on a 200k house. We also did the same thing with rates from May, 13 2010 and rates from November,
26 2009.
Jun 10
30-year $1039.68
15-year $1496.47
5-year ARM $945.62
1-year ARM $944.48
May 13
30-year $1065.1
15-year $1509.62
5-year ARM $949.07
1-year ARM $957.13
Nov 26
30-year $1046.91
15-year $1508.6
5-year ARM $975.7
1-year ARM $995.62
So compared to a month ago a mortgage payment is $25.42 less a month for a drop of 2.45 percent. While that is not a huge drop it is considering rates from last week were already pretty low.
So what is going to happen moving forward? As always it’s hard to tell. If the economy continues to have a rocky recovery I would expect that rates will stay at current levels and possibly break down to new all time lows in the next few months. If the economy starts to rebound we should see mortgage rates move higher perhaps much higher. Over the next 6 months while it’s hard to know which way mortgage rates will move if they move up they could move up substantially while if they drop they do not have much room to fall.
When a challenge comes up such as this housing finance debacle, it is the way we look at it that creates who we are and who we want to become. If we look at this housing market as a doom and gloom “Chicken Little Syndrome” vs an investor who sees this as a tremendous opportunity to buy property at 50-60% current value, if we were to fast-forward 5-10 years down the road, for many of the doom and gloom people, their tune will be “I wish I would have bought at that time – I shoulda, coulda…” and they will find themselves making excuses – vs the person who saw this as an opportunity, comes in and purchases properties from the banks, finds they may be able to purchase for 40-50% below the value of the property – and, once properties are acquired, find an abundance of potential borrowers who have a strong interest in having an opportunity to buy the property as they clean up their credit and reestablish themselves after this real estate debacle. Remember, as JP Morgan once said – “the time to buy is when there’s blood in the streets – even if it’s your own blood!”
- Michael Eckerman, Wealth Recovery Specialist, acttnowdotcom