Friday, October 14, 2005

Don't Worry, I've Got an Angle

This is nothing new for us "bubbleheads" or folks who have "seen this all before", but it's a good article to put on the record anyway.

* * *

People keep saying that these interest-only loans, etc., are no problem because they plan to just keep refinancing when their payments convert. Yeah, right, whatever you say. This LA Times article makes clear how such vaguely formulated plans have a way of not turning out as anticipated and may in all likelihood worsen a housing decline.

Some choice quotes:
"Even though he had no steady income, the 33-year-old computer consultant and his wife were able to purchase a $416,000 house in Los Angeles’ San Fernando Valley two years ago using an “interest-only” mortgage that guarantees low monthly payments for the first five years. After that, Wolynez’s payments could rise sharply – making him a prime candidate for default or, even worse, foreclosure."

"But like many financially stretched home buyers, Wolynez has a way out: He plans to refinance before his payments balloon"

"For many recent home buyers, it’s become a nerve-racking fact of life knowing that their term for paying a reasonable monthly payment will be short-lived – unless they change loans."

"The necessity to refinance complicates the calculus of whether Southern California’s housing market is vulnerable to a downturn. Federal Reserve Chairman Alan Greenspan warned last month that “exotic” loans could subject borrowers and lenders to “significant losses” if home prices fell."

"Over time, repeated refinancings could increase the risks of a more severe slump. Already, many fear that homeowners with interest-only mortgages will find themselves “underwater” – owing more than their homes are worth – if prices soften. For the borrower who has refinanced repeatedly, the amount of the debt is likely to be even greater, particularly for those who converted their equity into cash with each new loan or who have paid little or no principal."

"But lately, interest rates have ticked higher and there are indications that lenders are starting to tighten requirements, which would make it more difficult for highly indebted homeowners to refinance. Homeowners feeling pressure to find new loans may have no choice but to do so on less favorable terms."

"“I don’t think refinancing is something people should be doing frequently,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “In a falling interest-rate environment you may be saving enough to make it worthwhile. But the mortgage could go bad in the future and, in a higher-rate environment, there may not be a loan to bail you out.”"

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