I've been wondering how prevalent are "exotic" loans in Marin. Well, I'm still wondering. But Athena of the Sonoma Housing Bubble blog did a little poking around and came up with these references that do include Marin (thank you!).This article from June, 2005 takes a cautious look at "exotic" loans and places the market share of these loans at around 66%:
Housing markets across America have been booming for quit some time now, yet people are still rushing to get on the property investment bandwagon for fear of being left behind. In this clamor for closings, many of these Johnnie-come-late-lies are allowing themselves to be blinded by reason and they are accepting mortgage terms that could one day come back to haunt them.This article from August, 2005 claims that "exotic" loans were just 2% of the market in 2001 and jumped to 50% by 2004:
Two out of every three San Francisco home purchases are now being financed by interest-only loans, and Marin, San Mateo and San Jose are right on their heels. Nationally, a third of all loans granted last year were interest-only mortgages. It's no wonder that we may soon see a crisis.
Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.This article, also from August, 2005, puts a very positive spin on "exotic" loans and says that they are a good thing because of the high cost of housing in the Bay Area. Hmm, but I have to wonder: how much has the increased popularity of these loans actually caused the escalation of housing prices? Sort of a chicken-and-egg thing. Anyway, apparently by 2005 "exotic" loans occupied as much as 70% of the market:
So, this new demon, interest only loans, is what has allowed almost 70% of buyers in San Francisco, Marin and San Mateo to afford homes.And then there is this one from May, 2005 that also puts it at 70%:
[Interest-only loans] accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004, according to data compiled for The Chronicle by San Francisco mortgage research firm LoanPerformance, a unit of title giant First American Corp.So, to sum up:
2001: 2%Is it any stretch of the imagination to suppose that "exotic" loans make up about 80% of today's market in the Bay Area?
2002: 18%
2004: 50-59%
2005: 66-70% (50% were IO ARMs according to this)
2006: ?
11 comments:
As the article outlines: these loans were made in the last couple of years. Prior to that, there was a HUGH WAVE of borrowers went with long-term fixed and most of them stayed put. They are still there with their long-term (inflation-proof) fixed rate loans!
I was always conservative and got 30 year fixed rate mortgages until a few years ago. I now have I/O loans on all 3 of my properties although all fixed for 30 (10 year I/O, 20 year amortizing). I will get a 50% increase in my payments in year 10, but rent and wage increases should more than cover it after that long.
I have a few friends with more exotic loans (5 year ARMs and the like). Interestingly they did so in 2002 and got locked in in the low 4% range. They did it not because they were stretching, but because they simply figured they saved alot of money that way -- it was their financial planning. They make more than enough for a 30 year fixed but have been saving thousands of dollars over the past 4 years that they can now apply to their new, higher payments.
It is a mistake to think that everyone who takes out an exotic loan did so out of necessity.
Also, most of the rest of the world doesn't even have a 30 year fixed loan -- it is only because of the unique secondary market in the US that we have that option. In Australia, the longest you can fix for is 10 years, so by our definition 100% of Australians have "exotic" financing.
junkie -
Nothing you have said is news.
What's news is that perhaps 80% of all loans around here are now "exotic" (just as marinite is pointing out).
That, to me, sounds like "trouble."
But then again, maybe I'll stick my head in the sand like so many others and say... well, maybe it's not "trouble" at all because everyone is sophisticated just like you and your friends - and knows just exactly what they are doing.
Right and there are no specuvestors and everyone in the last two years who bought houses TOTALLY had the income to afford the 600k+ median price for their house... they just waited to buy and spend more than anyone else to show off.
Does anybody wonder why there are so many radio ads for mortgage/refinance?
The mortgage folks and RE brokers are loving our stupidity.
Buyer beware.
Home debtors beware.
athena and sfjack-
I did not state that everyone is financially savvy; I merely shared some anecdotal, non-statistically significant data to suggest that not everyone who gets an exotic loan is in trouble. The truth is, none of us know how distressed these borrowers are -- we can only speculate.
Also, I think I have been consistently posting that I am in agreement that prices are overvalued. However, foreclosures are still historically low, so the most obvious sign of market stress is not reflecting borrower issues.
I sold my Fairfax house in 2004, and when the market continued to steam ahead, I asked my agent how buyers could afford the never-ending price increases. I didn't know anyone who had the bank account for 10% or 20% down on these hugely expensive places. She flat out said, they can't afford it - 1st mortgage, 2nd mortgage, interest only payments - but people were buying anyway.
For the record: I used the word "exotic" too freely. Probably a standard ARM is not "exotic" as they have been in use for a long time (though not at a time when interest rates can only go up). The articles quoted in this post did not break down the types of adjustable loans into the more "toxic" types. But we all know what is meant however.
I did not state that everyone is financially savvy; I merely shared some anecdotal, non-statistically significant data to suggest that not everyone who gets an exotic loan is in trouble.
I understood you perfectly. No worries.
Not everyone is savy like you and your friends though. I respect your opinion -- what fraction of the estimated 80% do you think might be of the "toxic" type and are held by folks who are not very savy in Marin? I know of three families off the top of my head who fall in this category and they have no clue what is about to happen and they don't want to know. But what do you estimate?
The truth is, none of us know how distressed these borrowers are -- we can only speculate.
Again, what is your best guess? If you don't want to guess then I can understand.
Oops -- now you know my first name. D'oh.
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