Go, Go, Godzilla
How much further away could the peak in the housing boom be now that the 40-year mortgagae has reared its ugly head?
This monster of financial leverage was last seen traipsing around the bewildering streets of Tokyo fifteen years ago. What happened after that is well known, but obviously, not well known enough. Now after a long hibernation, he has returned with Fannie Mae's decision to start purchasing these mortgages. (I thought that this institution was supposed to start taking on less risk!?) Combine this loan feature with another highly popular mortgage, the interest-only, or IO (which describes the borrower's state in perpetuity) and you have a combustible combination. Let the fireworks begin!
Some basic facts about these devices of financial destruction. A fully-amortized 40 year loan builds equity at only half the rate of the traditional 30 year variety. For example, after 5 years the longer term has only accumulated 3.5% equity in the home versus the 30 year's 7%. Also, after the shorter term loan has been paid off, the 40 year version still only has 50% equity built up!! Of course, nobody stays in their home for 40 years, so who cares? When you can reduce your monthly mortgage hit from $600 to $550 a month per $100,000 , why worry about 2045? On a $500,000 fixer upper, two-bedroom "cottage" in San Diego with zero-down, that is a "savings" of $250 a month. Wow, now I can have my house and a daily low-fat, vanilla mocha, soy, low-foam latte too!! How about if housing prices drop 1% a year for the first five years? This buyer would be "underwater" to the tune of $7,500. That's a lotta java! "No problem. I've got a zero-down, interest-only, 40 year mortgage and if the house has dropped in price when my banker starts asking for principal payments in five years, I will just hand him or her the keys." With almost 50% of San Diego buyers going the IO route this year, this may be a popular mindset. But with new bankruptcy laws going into effect in a matter of months, there may be a big surprise in store for these buyers.
This monster of financial leverage was last seen traipsing around the bewildering streets of Tokyo fifteen years ago. What happened after that is well known, but obviously, not well known enough. Now after a long hibernation, he has returned with Fannie Mae's decision to start purchasing these mortgages. (I thought that this institution was supposed to start taking on less risk!?) Combine this loan feature with another highly popular mortgage, the interest-only, or IO (which describes the borrower's state in perpetuity) and you have a combustible combination. Let the fireworks begin!
Some basic facts about these devices of financial destruction. A fully-amortized 40 year loan builds equity at only half the rate of the traditional 30 year variety. For example, after 5 years the longer term has only accumulated 3.5% equity in the home versus the 30 year's 7%. Also, after the shorter term loan has been paid off, the 40 year version still only has 50% equity built up!! Of course, nobody stays in their home for 40 years, so who cares? When you can reduce your monthly mortgage hit from $600 to $550 a month per $100,000 , why worry about 2045? On a $500,000 fixer upper, two-bedroom "cottage" in San Diego with zero-down, that is a "savings" of $250 a month. Wow, now I can have my house and a daily low-fat, vanilla mocha, soy, low-foam latte too!! How about if housing prices drop 1% a year for the first five years? This buyer would be "underwater" to the tune of $7,500. That's a lotta java! "No problem. I've got a zero-down, interest-only, 40 year mortgage and if the house has dropped in price when my banker starts asking for principal payments in five years, I will just hand him or her the keys." With almost 50% of San Diego buyers going the IO route this year, this may be a popular mindset. But with new bankruptcy laws going into effect in a matter of months, there may be a big surprise in store for these buyers.
posted by Matt Butler at 9:46 AM
0 Comments:
Post a Comment
<< Home