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The Next Wave of Foreclosures: Option ARMs

Whoever said, Jim Cramer, that the housing market has bottomed doesn't know anything about Option ARMs.  Those loans are represented by the light yellow bars in the graph below, the ones that surge in 2010 and 2011. 

Never mind that a record 12% of all mortgages are 30 days late, or that the real unemployment rate is 16.5% and that there is a relationship between job losses and foreclosures, the Option ARM loans represent the next major obstacle to a housing recovery, and the problem with them is that they are not easily diffused with a refinance.  Sorry, President Obama.

By design, Option ARMs were created as an affordability product that would defer interest payments into the loan balance.  The phenomenon is known as negative amortization.

In other words, most owners of these products made a monthly payment that was less than the interest-only payment.  Refinancing these Option ARMs into a historically low 30-year fixed rate mortgage will actually increase the payment. 

The longer the loan was held, the larger the loan balance would be.  Now the problem is that the longer the property is held, the more the home value declines.  Rising loan balances and falling home values don't mix well.

During a rising tide in the housing market these products were risky, during a housing depression with falling home prices, they are radioactive.

Admittedly, while the volume of Option ARMs is smaller than the sub prime tsunami that we saw in 2007 and 2008, keep in mind that we didn't have 467,000 people a month losing their job in 2007 and 2008 either.

 

The Housing Bottom We've Reached Is Quicksand

Recession over? Recovery on the way? Housing on its way back up? Don’t prepare for the boom just yet. While the talking heads—they’re called that for a reason—are focusing upon a few bits of positive economic news, the economy still continues its slump.

 

I think it’s important that we be aware of our economic reality rather than to ignore the facts, focusing upon “rosy” news reports and wishful scenarios that may never come to pass. Awareness of the reality is fundamental to making rational and prudent business decisions. I want the facts, and will create my goals based upon what I KNOW to be true.

 

Here are a few of the reports and the facts behind them:

The jobless numbers have slowed their rate of increase. While the unemployment number isn’t climbing as fast as it was, according to Atlanta Fed Chairman, Dennis Lockhart, we now have 16% unemployment, when you count those who are no longer drawing benefits as well as the underemployed. And a number that no one reports is the huge number of self-employed who are either out of work altogether or who have experienced dramatic reductions in income.

 

Millions of the unemployed and underemployed cannot make their mortgage payments. They are not in the market for new homes, cars, or other consumer items. The loss of spending power from this group is in the hundreds of billions of dollars. Many of the jobs lost in manufacturing will never return, according to experts. And with the government and others predicting unemployment to remain high throughout next year, any recovery will be slow and painful.

 

Home prices have risen in many areas around the country. Yes, but in others prices continue to fall; with some areas having experienced price declines of as much as 50%. Nationally, home prices are projected to decline by 13% in the current quarter; and no one is predicting a return to pre-recession prices for many years, perhaps decades. With approximately 25% of homes with mortgages now worth less than their mortgage balance, a problem that has been projected to affect one-half of all mortgaged homes within the next two years, mounting foreclosures will continue to keep home prices depressed.

 

New home sales in July experienced the largest increase in 4 years. Here again, the positive news is overshadowed by the reality of where we’ve been. New home sales dropped off a cliff last year, and have remain sluggish in most areas around the country. Don’t forget that this has been the worst housing market since the Great Depression, so even slight improvements seem dramatic.

 

Sales of existing homes rose in July to the highest rate in 2 years. Dramatic reductions in prices, coupled with the new home buyer tax credit, accounted for much of the increase; and for those who want or need a home, there have been great bargains available. Buyers have been attracted by opportunities to purchase $500,000 homes at half price; and such deals abound in many parts of the country. But, experts have expressed concern that the end of the tax credit may signal a corresponding drop in sales.

 

Even if the numbers reflect that the recession has ended, statistics mean nothing to those who are out of work or are facing foreclosure. The number of consumers continuing to struggle is the truly important number. Until the employment numbers show significant signs of improvement and until we can stop the rising tide of foreclosures, the housing bottom we’ve reached will provide no more stability than quicksand.

 

The Housing Guru: The one source for all your housing questions

"Mortgage Meltdown"...Sound Familiar? This Time Commercial

6 Reasons why your house won't sell.

1. Your photos are unimpressive. The vast majority of home buyers start their search for a home on the Internet, your house had better look great in print. Not just nice... downright fabulous.  Today we are considering internet views as a 'virtual showing'... if your house gets past that, then they might (just might) make an appointment to see it in person... We consider that your SECOND showing. Today's buyers are expecting good quality photos (and lots of them... just 1 shot from the street won't cut it!), a virtual tour, maybe even a floor plan, if applicable.

2. It's overpriced. You've got to view your own property as objectively as possible.  Look at the home like a "buyer"... if necessary, go out with your Realtor and view other homes that are priced comparably to yours.  Be objective.  Given the other options on the market (and yes, you DO have to include short sales and foreclosures on your list... your potential buyers are!), would YOU buy your home, over the others on the market?

If no, then you either have to "update" your home to meet or beat the competition... or lower your price to adjust for it.  if you can't afford to sell for the price, that you KNOW it sell for, you may want to consider just removing it from the market.

3. It shows poorly. This could mean almost anything... from the barky, barky dog, to the smell of the diaper pail.  Maybe the carpeting is a bit worn, or the woodwork shows a lot of wear.  All things that don't show up on the internet, but whoa.... once you get inside the house... they show up, like a cat-urine-smell on a 95 degree day in New Orleans!

4. You're invisible. Today's buyer comes from the internet, almost exclusively.  Have you (or your agent) simply plopped the property on the MLS, and started praying?  Are you on all the websites...(Trulia, Zillow, Craig's List, Google Base, etc...) all the places that buyers are searching?  If not, you want to be.

5. Your listing is tired and stale on the market. Okay... yes, you overpriced your home initially when you first came on the market 2 years ago.  But since then you have reduced your price almost monthly... constantly chasing the market down.... Now, finally you're truly priced where you should be... but your listing is tired and stale.  Everyone looking for your type of property (ie: 3br/1.1 bath) in your area has already seen it, sometimes twice... and they remember that there was "something" about it that they didn't like... but what they don't remember is... what they didn't like.... was the price.   Time to take the listing off market.  Let it cool off (3-6 months), and bring it back on fresh in the Spring.  Yeah, you'll have 6 mos. worth of holding-costs... but you'll more than make up for it in your purchase price.

btw... Avoid the temptation to bring the house back on at a higher price, than when you left the market.  Just "don't do it"!

6. Your house won't appraise. The house looks great... you've finally gotten someone to bring you a bid on your slightly over-priced, but beautiful pied-a-terre.  But the bank appraiser says it's worth $20,000 less than what they've agreed to pay.  Heavy sigh... bite the bullet.... negotiate with them.   If you have to drop the price $20,000 to make it work.... "make it work"... chances are, anybody else trying to buy your house will run into the same problem.

Reduced! Gorgeous Single Level Boise Foothill Home...$249,900

Well Priced, Beautifully Maintained Eagle Idaho Home $224,900