Mortgage Resets

by Osman Parvez

In the last few years, millions of people took equity out of their homes and refinanced when interest rates were at historical lows and housing prices were at record highs.

As adjustable rate mortgages (ARMs) now reset to current interest rate levels, some borrowers could find their payments doubling or more. Those with negative amortizing, interest only, and "pay option" mortgages are most likely to see a big increase in their monthly payments.

Consider this situation (from an article in the Baltimore Sun),
[From a] A model letter provided to me by Countrywide includes this hypothetical example of what could be ahead for a California homeowner currently making only minimum payments monthly on a $402,000 loan.
The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.
If the loan reset at today's rates, the letter explains, the full payment required would be $2,887.50 - more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper, making the potential payment crunch much worse.
Pretty scary.

In 2006, $300 billion+ worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the Mortgage Bankers Association (source: AP).

What does this mean for real estate in Boulder? It's good news for buyers. I think we could see elevated inventory levels for a year or longer as borrowers who used ARMs and can no longer afford the payments seek the exit door. That means a buyer's market for the next foreseeable 12-18 months with relatively flat year/year appreciation. If you're a seller who bought last year, it could be a tougher situation but will vary on the situation.

How high will inventory get? I doubt we'll see 2-3x inventory like the now imploding bubble markets of Las Vegas, Phoenix, LA, or Sacramento. Demand for housing in Boulder is still very strong at most price points and that will absorb much of the additional inventory. Over the last few months, days on market (DOM) has been lower than previous years in Boulder which means well priced, attractive homes are finding buyers at a faster pace. Inventory over the past three months has averaged about 8% and 17% more than 2004 and 2005, respectively. I think it could reach 20-25%, but probably not much higher than that. Boulder wasn't a bubble market and hasn't seen the explosive foreclosure situation in other parts of the state.

What should you do if your payments are becoming unaffordable? Don't ignore the situation. If this is happening to you, it's a good idea to face reality earlier rather than dealing with a foreclosure. You may have options you haven't considered. Most homes in Boulder appreciated during the past few years and depending on your personal situation, you may even be able to exit with a reasonable profit. Talk to your real estate professional. I also strongly advise legal advice from a real estate/bankruptcy attorney. If you'd like to speak with me, you can reach me at ph:303.746.6896.

p.s. Not everyone is worried about ARM resets. Here's Jim Cramer.


Hat tip: Credit for the idea for this post goes to Mish's Global Economic Trend Analysis.

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