Three Quarters of Adjustable Rate Mortgage Holders Don’t Know How Much Their Payments Will Increase After Reset
October 23rd, 2007Fantastic!
Via: CNN:
About $50 billion in adjustable rate mortgages reset this month, driving interest rates up for many borderline borrowers. And despite efforts to raise awareness, it doesn’t look like anyone is really prepared for what’s to come.
“I don’t know if there’s anything much [borrowers] can do,” said Keith Gumbinger of HSH Associates, a publisher of mortgage related information. “Hopefully, they’ve been prudent about preparing for it, building a nest egg or refinancing the loan.”
But most borrowers are likely to just scramble to pay the higher expenses – some of which will jump by 50 percent and come as a big surprise.
According to a survey conducted last month for the AFL-CIO by Peter D. Hart Research Associates, three quarters of borrowers have little clue about how much their payments will increase when their loans adjust. Nearly half don’t know how their loans actually reset.
“This survey shows that many homeowners simply are not prepared for the steep rise in mortgage payments that this market inflicts on ARM holders,” John Sweeney, president of the AFL-CIO, said in a press release.
When asked whether they were confident or worried about making their monthly mortgage payments over the next few years, 41 percent of homeowners whose adjustable rate mortgages (ARMs) had already reset said they were worried. Only 18 percent of pre-reset borrowers were concerned.
For a person to know what their payment will be, that would require they know what their interest rate will be. However, ARM rates are calculated using only two factors; the “Margin” which is constant and known from the outset, and the “Index” which is dynamic and always changing. It would look like this:
Index + Margin = Rate.
The Index is typically something like the London Intra-Bank Offer Rate (LIBOR index), or the 12 Month Treasury Average (12 MTA).
If you know somebody who can accurately predict their ARM payment, then you know somebody who can accurately predict the markets, and you know someobody who’s lying.
Anybody who can predict the market sure as hell would not have an ARM right now.
It’s not rocket science to get a pretty good idea of what the payment will be, the closer the piece of crap ARM loan gets to resetting. Lots of idiots think that the teaser rate is fixed and only figure it out when the amount due starts going up each month. Of course, the person with the ARM might not be an idiot. Misrepresentation is rampant in this filthy industry:
http://www.mortgagefraudblog.com/
I would be very interested to know what fractions of the 3/4th who can’t estimate the payment fall into categories of fraud victims, math challenged, working class Californians never planning to pay it off, and people making a logical choice. If someone had an older fixed mortgage, it could be entirely reasonable to plan to temporarily switch to an ARM for 2 years, then quickly switch out on the way up.
The contingency which you naively couldn’t plan for would be being rejected for refinancing to a fixed loan.
There is a lot of false common wisdom on TV reports of the bust. First, the repeating that ARM owners need to just negotiate with the lender. It’s pretty clear that the lenders have a strong incentive not to negotiate at the beginning of the wave. Then in the middle of the ‘crisis’ it will make sense to for them to throw out some mercy to prolong the period that people can continue to make payments. Only towards the end will lenders really want to negotiate, because they couldn’t find replacement buyers for foreclosed houses. There is a dynamic of individual vs. group incentives, in the same sense of Henry Ford’s statement about paying middle class wages. Companies have an incentive to compete to pay the lowest wages possible, but rely on other companies paying middle class wage. Everyone paying middle class wages would permit an emergent property of wealth generation benefitting everyone, yet how could companies coordinate *all* not being greedy, because of the incentive to cheat.
I wish I understood a bit better what the cost is to the bank to possess a foreclosed house. The news repeats that it costs the bank money to manage, so they dont’ want foreclosures. Yet, isn’t the bank benefitting from the property. They could pay gardeners to go around mowing the lawns and wait a few years. In The Jungle, one of the storylines was real estate companies repeatedly selling the same houses to naive immigrants who didn’t realize the insurance and tax payments, and then they lose it when they are injured as butchers, and it is sold to the next family.
The banks will find out too late that they should have renegotiated these loans–when they find that they have hundreds of acres of deteriorating, vandalized, and asset-stripped properties to pay taxes and insurance on for the next then or twenty years.
My bet would be that the most grossly overvalued properties will not be marketable at the prices they most recently sold for, for at least ten years–at least not in inflation-adjusted dollars–and quite posibly twenty or more years. (Not till the next bubble, if there is one.) Throw into the mix that the economy and incomes are declining, and the situation looks very unpromising for the banks.
sharon:
The houses that are way, way out in the exurban boonies will likely be left to crumble and collapse.