Millions w/interest only mortgages will be losing their homes over next decade

Discussion in 'Economics' started by ByLoSellHi, Sep 8, 2009.

  1. The House Trap

    Published: September 8, 2009

    Edward and Maria Moller are worried about losing their house — not now, but in 2013.

    That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

    Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

    Edward and Maria Moller and their son, Isaac, at their La Mesa, Calif., home, which was financed with an interest-only loan.

    It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

    With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

    The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

    “I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

    Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”

    After three brutal years, evidence is growing that the housing market has turned a corner. Sales in July were the highest in a year, and August gives signs of having been even better. In nearly all major cities, home prices are now rising.

    Celebration, however, might be premature. The plight of the Mollers and many others in a similar position is likely to weigh on any possible recovery for years to come.

    Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices.

    Interest-only loans are not the only type of exotic mortgage hanging over the housing market. Another big problem is homeowners with “pay option” loans; in many of these loans, principal balances are actually increasing over time.

    Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

    The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

    John Karevoll, a longtime senior analyst for MDA DataQuick, sees the plight of interest-only owners this way: “You’re heading straight for a big wall and you can’t put the brakes on.”

    The greater the length of the interest-only period, the more years the owners have to hope for a recovery, government help, or a miracle. But a long interest-only period works against them, too. A loan that is interest-only for its first 10 years means the entire house has to be paid off in the next 20 rather than the more typical 30 years.

    One possible solution: start paying extra each month now to pay down the principal before the loans reset. But many homeowners took out the maximum they qualified for, and don’t have the means to pay more, or at least not enough to make a sizeable dent in the principal.

    A decade ago, interest-only loans were rare. But as the boom heated up and desperate buyers sought any leverage they could, these loans became ubiquitous. They were especially popular in Florida, Nevada and above all California. In 2004, nearly half of all buyers in the state got one.

    The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.

    “Everyone out here always preached to me, ‘Buy real estate. It’s the best investment you’ll ever have,’ ” said Mr. Moller, who grew up in Iowa. “Then all this stuff started crumbling and I was like, ‘You’re kidding me.’ ”

    While default may be a long way off, the prospect is already dampening the couple’s spending habits. They are postponing the new windows the house needs. They recently bought a 2005 Nissan Murano instead of a new car, and they have put off buying a flat-screen TV.

    Mark Goldman, a San Diego mortgage broker, said many interest-only buyers thought they would be in control when the loans reset. “They expected to move or refinance,” he said. “But you can’t do either when you’re under water.”

    Among the people Mr. Goldman put into interest-only loans was himself. He refinanced five years ago to shrink his payments so he and his wife, Julie, could put their two sons through college. When the interest-only period expired a few months ago, their payments went up by 40 percent.

    The Goldmans have been in their house for 20 years, which means they still have some equity. Still, they are unhappy to find themselves in “a world different than we planned for,” said Mr. Goldman, a lecturer in real estate finance at San Diego State. “If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”

    The federal government, through the finance company Fannie Mae, increased the scope of a program this summer that might help some interest-only borrowers by letting them refinance. But it will not help many in coastal California. Only loans owned by Fannie Mae are eligible, and during the boom Fannie had a limit of $417,000 — not enough to buy a home at the peak in a middle-class community.

    Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700.

    “I understand I took a risk,” Mr. Janis said. “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

    Homeowners with interest-only loans have a much greater likelihood of default, the First American CoreLogic figures indicate. Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada.

    “The bailout is not trickling through to help many of us who have worked hard, under very difficult circumstances, to keep paying our bills,” Mr. Janis said. “I am stuck with nowhere to go — absent trashing my credit and defaulting.”
  2. pitz


    So basically, all the young people who bought houses this past decade, are f*cked.

    Not only did they graduate into the worst possible job market, but they're going to have any equity they possibly could have accumulated, confiscated by Mr. Market.

  3. Jym


    Yeah i graduated last August and I'd say almost half of my classmates who finished up in May or over the summer with me bought a house where they were relocating to.
    That's just crazy they thought they were getting such great deals but the majority are probably underwater already.

    I went with the simple one bedroom apartment.
  4. timmyz


    corporations have been borrowing interest only for decades. corporate loans are not like mortgages where you have to pay a bit of principal each month. corporate loans are all bullet maturities. the corporation just pays the interest portion until the entire principal becomes due in the final year.

    what happens when the principal is due in the final year? the corporation just refinances it (i.e., extend the maturity). then it can pay interest only again. yes, it is that simple.

    so if lenders just let these homeowners keep refinancing with bullet maturities, these people can just continue paying interest only. the homeowner just won't own anything. he is just paying rent.
  5. Jym


    If credit freezes up again like it did last year that could be the mother of all bubbles to bust when those corporations can no longer refinance.
    The Fed Reserve is going to throw everything they can at the problem so yeah it'll probably be a few more years off but still Scary stuff.
  6. Your good credit makes no diffrence anymore. Thoses with great credit are paying default rates on credit cards even though they never defaulted.. Everyone is paying thru the nose if they want any credit.

    So as long as you won't need ti finance anything for the next decade you might as well default, your debt has all ready been prided that way.
  7. Always the slave, never the master.
  8. $460K for that place? It looks like a glorified trailer.