Sunday, August 05, 2007

Why it will get worse - the data

MarketWatch has an article today entitled "Western states went exotic with mortgages" where they layout data from First American LoanPerformance on the types of mortgages that were taken out across the country, and specifically here in California. If this data doesn't scare you about the near term housing market, I don't know what will. So here it is:

"Payment-option ARMs" (AKA - negative amortization loans... this is where you pay LESS than the interest on the loan and the difference between your payment and the interest due is added to the principle of the loan! Your payments will reset to a much higher amount 2 or 3 years later and will be set by the new interest rates at that time)

California - 24% of all refinanced and first mortgages in 2006
Nation wide - 11% of all refinanced and first mortgages in 2006

To give some perspective, in California, payment-option ARMs made up just 0.8% of all loans in 2003 before jumping to 7.5% in 2004 and more than 18% in 2005.

Interst Only (you pay just the interest, and no principle for the first couple of years, and then your payments reset to new market based interest rates, typically after 2 or 3 years)

California - 32% of refinanced and first mortgages in 2006
Nation wide - 22% of refinanced and first mortgages in 2006

This means that 33% (1 in 3) mortgages across the country last year were either negative amortization loans or interest only. In California, more than 1 in 2 were either negative amortization loans or interest only. Let me say it again... 1 in 3 nation wide and 1 in 2 in California!!!!!!! So if you think you have seen downturn, wait for the 2 to 3 years after these ARMs reset (2008 / 2009) and see how many people default.

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