Big switch to ARM's; the red flares are lit in real estate

[xray s]

All the stops have now been pulled in order to keep the real estate bubble from bursting. Alan Greenspan six months ago advised new home buyers to switch to ARM's to finance mortgages, even though the trend is rising interest rates. New mortgage products, like monthly adjustable rate mortages, 0 principle payment mortgages, and reverse amortization mortgages are putting people into homes they may not be able to pay for as interst rates rise.

All these things signal desperation before the coming real estate crack up. Buyer beware...you live in the Corporate States of America, and when the hammer drops, they will be protected by their bought and paid for politicians in Washington, while the taxpayer and the homeowner takes it in the 'you know where'.

http://www.dailyherald.com/search/searchstory.asp?id=241

More consumers opt for adjustable-rate mortgages
Young buyers attracted to adjustable-rate loans

Posted Tuesday, April 12, 2005

NEW YORK — As interest rates rise, more families are opting for adjustable-rate mortgages when they buy or refinance their homes. Unlike the traditional fixed-rate mortgages, which lock in a set rate for 15 years to 30 years, adjustable-rate mortgages typically start with low interest rates that rise over time. The Mortgage Bankers Association, a Washington, D.C., trade group, says adjustable-rate mortgages, or ARMs, have accounted for more than a third of home lending activity in recent weeks, and their share could increase as the Federal Reserve continues to push up interest rates in coming months...


...Another increasingly popular ARM is the payment option loan. These mortgages allow families to choose how much they want to pay each month — a minimum fee that doesn’t fully cover the interest, an interest-only payment or a full payment that covers both principal and interest. Kent Fullerton, 34, and his wife Cindi, 35, chose an option payment ARM when they refinanced their four-bedroom ranch-style home in Costa Mesa, Calif., in March. They have a 4-month-old daughter and hope to have more children.“We know we’re taking some risk with the new mortgage,” he said. “But we didn’t want a 30-year fixed mortgage because we’re thinking we’ll want to sell this house in a couple of years ... and we got a better rate on the ARM.”...

...The payment option loan is actually a “negative amortization loan” through which buyers can make early payments that don’t fully cover principal and interest; the shortfall is added back into the loan, he said....

...Like Gumbinger, Hsieh worries that as ARMs proliferate, home buyers may be exposed to risks they don’t fully understand.
“The older generation remembers when interest rates were in the teens and remembers how much that can hurt when you have an adjustable-rate mortgage,” he said. “The younger generation has only known the low interest rates — in the single digits — since the mid-1990s. ... There could be a sharp learning curve here.”

Us older folks also remember the S&L meltdown.

A sharp learning curve indeed...right over a cliff.

[brystheguy]

1. If they plan on "trading up"

to a better home and getting rid of their current ARM, then they will be in big trouble. There will be no one looking to buy their home when the market collapses and they'll be upside down as far as home valuation goes. Shocking that a third of all lending activity consists of ARMs.

[Name removed]

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[xray s]

3. How about 100% LTV "Payment Option Loans"?

Something wicked this way comes...:scared:

[mcscajun]

4. Truth in Lending

Instead of "Negative Amortization Loan" they should just call it what it is: "We OWN Your Ass Loan".

[dcfirefighter]

5. Land Bubble

Real Estate doesn't behave like other markets. In most markets, if the price of a good goes up, the factories put in more time, and the shippers ship more product. Eventually, the demand is met, and the prices stabilize.

Not so in real estate, or more exactly, land. Developers can build more houses, extending the suburbs further and further, but eventually, the suburbs are too far away to be useful, or they run out of room. The increase in demand for land is unmet by an increase in production, meaning higher and higher prices go to those who already own the land.

As land prices are on the rise, folks who might sell tend to hold out for a better price than the guy down the street. This goes on and on, with a greater fool coming to buy, counting on continued future increases. A shock, such a spike in fuel prices or interest rates, sets this cycle on it's head. The speculative prices of land dissappear, leaving landowners with a paper loss, and a real loss of equity to borrow and spend against. The whole economy generally follows.

A similar story exists for oil. Increases in prices do not increase the amount of oil in the ground. Oil markets are slow to respond to demand and price changes, due to the nature of exploration, extraction, and refining. However, no oil price raise can increase the production of natural oil.