Openshaw breaks the article into a few major sub-points, following with reasons for each. Let’s dive in!
The first sub-section supports evidence of a bottom:
This is true, according to the stats I have seen, the biggest subprime resets were last October, so this means that most of these 2/28 loans will either be refinanced or foreclosed on by this October. From a lender standpoint, these loans have now been off the market for around a year so the crazy, subprime effect should be just about over.
“4. Rate resets on subprime loans to drop. Subprime rate resets are a big
foreclosure driver, and according to the research firm First American CoreLogic,
subprime resets should drop dramatically by October 2008.”
On the flip side, many people chose to do 5 year Interest only ARMS. The problem is that some of these people in these loans can’t refinance again, even if they have outstanding credit scores. A lot of these loans were stated, meaning that there was non-traditional income documentation provided to qualify for the loan. These loans are used mainly by people who are self-employed or idiots who bought too much home and shouldn’t have really qualified. These could become a big issue because most stated programs have gone by the wayside. If people can’t afford their mortgages, they will walk away or get a loan modification.
Flies in the Ointment?
“1. Some principal payments required. Many
option loans allowed borrowers to defer principal payments for several years. As
those years go by, principal payment requirements could act like subprime
resets, pushing some owners over the edge.”
These are also known as negative amortization (or “neg-am”) loans. The resets of these could be very nasty. If home values are up in the area or are going up nationally, these types of loans can work with a savvy borrower; this requires a large amount of discipline and knowledge with investing.
I think some areas will not be affected as much by this type of loan, but states with a very sharp decline in values will be severely affected. The reason is, once these loans increase to a balance that is 115% more than the original, borrowed loan amount, the person is forced to start paying the full amortization amount and in many cases this will double the current payment. When something like this happens and the home can’t be sold because of being over-financed, the only other options are to foreclose or just walk away.
WHAT to do…
“2. Look for bargains this fall. At least three factors should
lead to a price nadir this fall, if it hasn't happened already, and the typical
seasonal fall sales decline will magnify the effect:
REO-holding banks get
more desperate. A lot of banks have been holding a lot of real estate for a long
time, and you know what that means.
Investors sell for tax reasons. A lot of
investors hoped for better but may throw in the towel to capture tax write-offs.
Homebuilders clear inventory, to get it off the books and start 2009 fresh.”
Yep, she is 100% right! There are deals all over the place. If you are looking at buying, this might be the best time to do so. I would say that in the next two years, the housing market should hit bottom and start to go back up. Again, it’s all local. Make sure you shop till you drop and research everything you can. Also, never pay the price they are asking, always low ball!!
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