Comments on: A legislative agenda

By: Jim

Jim — Fri, 09 Jan 2009 15:17:38 +0000

"I wonder how many people who bought those luxury condos at SML or in Florida are filing for bankruptcy now." - OJ

Lots of them. CA, FL, and AZ are some of the biggest depreciation areas, and these regions had the largest proportion of subprime and affordability type loans. In many cases, half of current home sales are foreclosed properties.

While home prices within regions of the US had declined before, particularly on the east and west coasts (CA, NYC, Boston), this is first time that they have declined on a national basis. And if you look at how long home price cycles are, then you'll see a very disturbing trend: prices may not recover to their recent highs for another 10+ years and it may be 5+ years from their first decline before they begin to turn around in many areas!

What this means is that even if you have equity in your home, then it is difficult to sell your home unless you make a substantial price concession. I hope you like your current home because you may be there a while. The only silver lining is if you are a first time purchaser, then you may get both a low price AND a low rate - very rare combination.

Even if you're not a financial genius remember that there is no such thing as a free lunch. If you can't afford a fixed rate loan, then you are making a gamble that you can afford an ARM in the long run.

By: Other John

Other John — Fri, 09 Jan 2009 02:06:38 +0000

Good points. I remember when we built our house, they were very clear. They said there was a chance that our house would appraise and be valued higher than our purchase price, but that it was not a guarantee. It is valued higher by about 8% which is nice, but we don't plan on moving anytime soon. I wonder how many people who bought those luxury condos at SML or in Florida are filing for bankruptcy now.

By: Henry

Henry — Thu, 08 Jan 2009 23:11:25 +0000

Here's something to consider

If the mortgage broker said that your property would appreciate, that is actionable. Lots of them did just that. It used to be that you could promise anything as long as you added a "but" to the end. But that's not the case now.

By: Dan Radmacher

Dan Radmacher — Thu, 08 Jan 2009 22:29:43 +0000

And it's fine if the house keeps its value or appreciates so that you can sell or refinance at the appropriate time. But if housing values decline, neither option works and you get stuck with the adjustable rates or balloon payments. Often, these things only make sense if someone convinces you that your house will always appreciate.

By: Other John

Other John — Thu, 08 Jan 2009 21:53:32 +0000

I think the problem a lot of folks got into Jim is that they bought homes with low-payment ARM's but had no real intention of moving once the loans re-set and they had to start paying more in principle or a higher interest rate. Like you said, for short-term residents, an ARM could be a great way to go to save money if you know you'll sell within a few years. If you're going to stay long-term, fixed is the way to go to get some equity. I think the other issue is that I think the ARM debt-income ratio calcs are likely based on the initial payments, so people think they can "afford" a $250,000 house on a $30,000 salary, which is completely false. They can afford to pay only the interest (or less than the interest) on the loan, but in reality cannot truly afford the house. Then, they wind up wondering why they default on a home they thought they could afford. If they based the calculation on the re-set payment or whenever principle payments had to be factored in, there would be far fewer ARM loans issued, and maybe the housing & real estate markets would not have tanked when foreclosures became commonplace.

By: Jim

Jim — Thu, 08 Jan 2009 20:52:57 +0000

Regarding regulation, traditional ARMs are not the problem. In general, interest-only, negatively amortizing loans (option ARMs), and some short-term ARMs attract borrowers who are concerned with affordability and are problematic for marginal credit and high LTV borrowers. We can see this in data that shows who is defaulting and who is not.

Let's see, in 2003 I got a 4.00% 7/1 ARM. This has helped shave over $300/month from my mortgage payment as compared to a fixed-rate loan. Since that time, I can hold this rate until 2010 and then let the rate float which may be a good idea given that the new rate will be some index + a fixed margin (1-Yr Libor + 2.25% or about 3.50% currently), or I can refinance into current historically low fixed-rate products or another low rate ARM.

Given that the average home tenure in the US is around 5 years, then often ARMs make sense to the credit worthy. Never purchase a home where the debt-to-before-tax income ratio is more than around 30%, and verify your payment before and after reset if you get an ARM rather than blindly follow a broker. In the end, it is caveat emptor, and I know that this is a confusing product, but borrowers must not take home financing lightly. As I said earlier, consumers are always better off with more rather than fewer options.

By: Henry

Henry — Thu, 08 Jan 2009 19:54:32 +0000

"we'll urge the General Assembly to stay out of the controversy over public prayers by State Police chaplains."

Exactly, the chaplains should be able to pray however they wish.