Rate Rise Pushes Housing and the Entire Economy Down The Sinkhole
By Jay Fleischman, New York Bankruptcy Lawyer on Jun 21, 2007 in General Bankruptcy Information
So Bloomberg is out there predicting the end of the world as we know it. The worst is yet to come for the U.S. housing market, or so the article claims.
The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.
Some industry people are discussing a downturn that could last up to three years, dragging down everything from job creation to consumer confidence. Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser, claims, “It’s not just a housing recession anymore, it looks more and more like an economic recession.”
Add to the mix the fact that big money is hurting severely. Goldman Sachs and Bear Stearns both said last week that rising foreclosures reduced their earnings. Sure, they’ve got a lot to spend but if the big kids are battered and bruised then what does it say for the average consumer?
The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by Mclean, Virginia-based Freddie Mac. Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won’t be able to refinance into fixed- rate loans. Many of them have seen their home’s value drop even as their interest rates adjust higher.
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That’s enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002. Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That’s a sign that even the most creditworthy borrowers are being squeezed.
Borrowers who got loans with so-called teaser rates are in the biggest bind. Prices surged a record 12 percent in 2005, spurring buyers to”stretch” to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments. Some have payments based on interest rates as low as 1 percent. At the end of an introductory period, the rate can more than quadruple, leading them to be called “exploding ARMs,” he said. Some loans allow borrowers to choose how much they want to pay, with the balance added to the loan’s principal, making it possible to owe more than the home’s purchase price.
Source: Bloomberg LP
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