We were worried about this stuff YEARS ago!!

I wonder if we ever really do learn from history??

I was taking a look BACK at my collection of articles about the real estate world, and I came across a BusinessWeek article dated Sept 11, 2006. In it, the writer is discussing ARMs and calling them “nightmare mortgages” where “the bill is coming due”. YEP, that was three years ago, and that was BEFORE the most recent crash. The article goes on to talk about the fancy bookkeeping banks were doing to show higher-than-normal profits on these loans and to mask the risk of default. Three years ago, alarm bells were sounding in many similar articles, but this one really puts the problem in a nutshell-you can check it out here.
( http://www.businessweek.com/magazine/content/06_37/b4000001.htm )

And you know what banks and mortgage brokers did? Kept on lending. Kept on issuing ARMs, kept on telling consumers that things would be ok. Pretty much hiding their heads in the sands and hoping that the tremors they were feeling in the financial markets were nothing but bumps in the night.

And what are they doing now, three years later? Well, what they AREN’T doing is much to avoid another round of foreclosures. The Newsweek article refers to loans in 2004 & 2005 that would be coming up for re-adjustment soon. Many of those loans have already gone into foreclosure, but what about the loans that were made in 2006 and 2007, when credit was still cheap and ARMS were still popular?

Yep, that’s right. They’re all due for re-adjustment. In many cases, those loans will re-adjust upward, due to the nature of the then-vs-now financial markets.

You heard me, the loans payments will actually go UP! And that means people who managed to keep on top of their payments will suddenly be looking at not being able to make them.

AND their properties aren’t worth what they bought them for. Of course, there’s nothing new there. BUT, these buyers will actually be in worse shape than the buyers mentioned in the BusinessWeek piece, because these newer borrowers are the ones who bought in at the very top of the market. People who bought in 2004 and 2005 are screwed; people who bought in 2006 and 2007 are ROYALLY screwed.

And how’s the job market looking? I’m not seeing any kind of huge recovery where I am here in the San Francisco Bay Area-how about you? Sure, there are dribs and drabs of profit and people who have jobs are keeping them for now. But here’s a chilling thought-when that BusinessWeek article was published (Sept 2006), the Unemployment Rate in California was 4.8%. That’s right…4.8%.

Three years later, the CA unemployment rate for September 2009 was 12.2%-nearly THREE TIMES what it was when concern was being expressed over the ability of borrowers to repay their loans. (For good, but scary, historical unemployment data see http://www.labormarketinfo.edd.ca.gov/ )

HOLY MORTGAGE-BACKED-SECURITY, BANK-MAN! What are you going to do now that a whole new set of ARMs is ready to blow up your face and there are even fewer people with jobs?

Well, it looks like…not much. As I mentioned before, the banks seem to be having a very hard time actually implementing all the loan modification programs they’ve been instructed to put in place by their newest share holder-the Taxpayers.

So, who the hell knows what’s going to happen when payments go even higher. All I can say is, check your loan carefully, and if your ARM is about to reset, make sure you know what the new rate, and the new payment, is going to be so you can start getting your budget modified now.

Because that’ll be a whole lot more likely than actually getting your bank to work out a LOAN modification for you.

Stay tuned-next week I’m taking a look at the various programs in place for loan-modification. AND I’m having alphabet soup for lunch (TARP…NAMA…HAMP…)

Rebelliously,
Larry