Quote:
Originally Posted by AGDee
I have an Adjustable Rate Mortgage. I don't have a crazy one, I have the "normal" kind from before they started going crazy with them.
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I just got back in town from a mini trip down the coast to Galveston Island, TX. Fortunately, there wasn’t any oil spill where I was. There was a great deal of weddings, bachelor/bachelorette parties going on as the start of wedding season for 2010 hits and there was definitely nothing recessionary about the spending habits going on down there. Almost two years since Hurricane Ike tore up the Island and severed the economy it appears to be back into the swing of things.
Stocks rallied to correctional points on Friday and Bonds tanked. Today was a horse of a different color. After seeing huge movements across all markets last week we saw stocks, treasuries and bonds go down all day. That doesn’t happen often but nevertheless can occur. It could mean a plethora of things, but usually it’s a good indication that market participation is low that the investment community is waiting for guidance.
AGDee touches up on something important that I thought I’d chime in and share my own two cents on – Adjustable Rate Mortgages (i.e. ARMs). The crazy ones that AGDee is referring to are the Payment Option ARMs. The not so crazy and in fact good ARMs, like AGDee’s mortgage rate, are Standard Fannie Mae/Freddie Mac Agency Hybrid ARMs.
A brief history on Payment Option ARMs:
In the early 1980s these types of mortgages were originated door to door by two guys working for a small community bank. Eventually, Washington Mutual bought the bank and took over the product, which took a significant increase in the Niche Investor market and later got securitized into Private Labels. They featured “Negative Amortization”. In laymen’s terms this is how it works. Negative Amortization is the ability to increase your principal balance of a loan that is caused by making payments lower than a set interest due. The remaining interest owed is tacked on to the loan’s principal balance, which ultimately causes the borrower to owe more money. For example, if the periodic interest paid on a loan is $400.00 and a $300.00 payment is made, as an allowable option, then $100.00 is added over to the principal balance of the loan. While these types of loans assisted borrowers by allowing them to make lower monthly payments for a short period of time the payment shock eventually catches up. At some point these hidden time bombs can reset and increase the payment to the borrower significantly, which can cause payment default. Here’s the stink of the whole thing - prior to the Subprime meltdown when originators were selling these types of loans there where issues from all sides. Naturally the banker sells the loan to the customer but what most people aren’t aware of is that the Federal Regulators, like the O.C.C., knew about these products and didn’t do anything until it was too late. Also, the rating agencies like Moody’s and S&P where aware that these types of loans had much looser underwriting guidelines than conventional mortgages and didn't do anything. In other words, if you couldn’t qualify on a vanilla ARM mortgage (like AGDee’s) then you could actually qualify for a Payment Option ARM. How does that make any financial or economical sense? Something about that sounds completely wrong – you don’t qualify for a government backed loan but you can have a "special" type of loan that is really a hidden time bomb??!!! An economics professor at George Mason made a comment that as much as there was predatory lending there were also predatory borrowers. Take this for instance – an 18 yr old kid working at the Smoothie King Shop down the road making minimum wage pulls out a $1,000,000.00 loan for a mortgage (this is a true story by the way). Believe it or not, there are Ivy League MBAs that don’t take out those types of mortgages. What was this guy at 18 thinking? For starters, the Mortgage Banker could easily qualify the individual and then three months down the road refinance the borrower into a new Payment Option ARM to avoid the payment shock. Smart huh ?? – No! What eventually happened was that the investment community quickly lost its appetite for these types of products in the Secondary Market. The bid price went from a sweet break even to 98, to 96, to 94 cents to the dollar in the span of two days! At the end of the day these types of mortgages were intended for savvy type borrowers that knew their income would increase substantially in the near future - not normal Joe's & Jane's.
Now a little on the safe type of ARMs: Fannie Mae and Freddie Mac or the two Government-Sponsored Enterprises (GSEs) regularly buy/sell vanilla Adjustable Rate Mortgages in the Secondary Market. These types of loans are intended for people that plan on moving in about 5-10yrs and are looking for a good rate for a short period of time. They are typically a little tougher to qualify on when compared to Fixed-Rate mortgages. Most Vanilla ARMs are attached to either the CMT or Libor index. Relatively speaking, the indexes have been performing fairly well and consumers that have recast out of their initial fixed period are mostly content with their interest rate. PM me if you really want to learn more about this. This could easily be a whole other thread in itself.
Stabilization in the housing market will be a key indicator that will tell us when things start shifting back to “normal” levels. The Achilles Heel there is you need a job to get a house and there’s no job with no economic recovery. I know it’s frustrating for some of you but hang in there. Going back to school or learning a new trade may be the interim answer.
Best of Luck,
Boodleboy322
Hybrid Mode
