January Rant-A Call to (examine) ARMS

What’s in a name?? When is an interest rate not an interest rate? When it’s an ARM. I think it’s time we call these loans what they are-teasers, ticklers, or worse, traps.

I’ve been staying on top of what’s going on in Real Estate in the San Francisco Bay Area for awhile now, and I’ve got to be honest, I’m getting pretty nervous about what I’m seeing on the ARM horizon. I’ve mentioned it before, but in talking to people and banks in the area I’m afraid there’s a lot of head-in-the-sand attitudes out there about this topic.

Think about it. In the Bay Area, most people have to use an ARM to get into just about any home, in order to soften the blow of the payments they have to make in the beginning of their mortgages. Often, the thinking goes that by the time the ARM rate increases, the buyer will be in a position to refinance their mortgage for better terms, or they’ll be ready to sell in any case.

So what happens when their real estate has actually gone DOWN in value?? Or if the buyer can’t refinance? Well, then, the payment goes UP. And UP…, and if they were barely making ends meet already, then they’ve gotten themselves into a trap that leads directly into default and often foreclosure.

Why is this on my mind right now? One of my readers just sent me a CNN.Com piece from a couple of weeks back that really puts it into perspective:

“For many of the more than 350,000 option-ARM borrowers, it's time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will default, according to Shari Olefson, author of "Foreclosure Nation: Mortgaging the American Dream."
"We've still only seen the tip of the foreclosure iceberg," she said.” (CNN.com)

Yep, that’s 350,000 loans resetting that are at higher risk for foreclosure THIS YEAR than they were LAST year.

And what’s the government doing with our money to help ease these extra burdens on the economy? That’s a REALLY good question. The tax credit is set to expire this year, there are still no teeth to any of the modification programs, and the banks have been remarkably silent on the issue of how they’ll handle this next wave of foreclosures. Add to that the reminder that the government re-purchase of mortgage backed securities will taper off this year, and you’re looking at least one more tough year in the housing arena and a good case for thinking interest rates will rise. Besides, there’s not a heck of a lot left for the government TO do in this area.

So what’s a borrower to do if they’re looking at a mortgage payment that’s suddenly going to go up? Sadly, I don’t have a lot of advice there. If you’re looking at default/foreclosure, you know my best recommendation is to explore all your options, including short sale.

BUT, if you’re one of those lucky few who are actually buying a house in this environment, you should consider one question very carefully: can you, if the interest rate increases in a few years, still afford the payment? Are you already 110% stretched, or is there a little wiggle room in your budget?

Remember the Schwab posters… “My house is worth a million bucks is NOT a retirement plan”? If you’re looking at taking an option-ARM, make your motto “If the payment gets too high we can just refinance is NOT sound financial strategy.”

So, me Rebellious Readers, before you take up ARMS, take a sharper pencil to your worst-case scenario budget.

Stay Rebellious!
Larry