Losing Your Religion... err... I mean house
From The Nation & Wall Street Journal
"People haven't merely been buying houses, they've been conducting scary experiments in financial innovation."
Or as us people with common sense call it... a Reverse Ponzi Scheme
"People haven't been borrowing aggressively merely to buy houses--they've been borrowing against the appreciated value to buy all kinds of other stuff. Americans have been using their houses as MasterCards, turning about $726 billion of their home equity into (borrowed) cash between 2001 and 2005."
And they have bought lots and lots of STUFF with that $726 BILLION dollars! They keep the stuff, and pass on the bill disguised as a house to the next big fat fool waiting in line to bend over.
"So many households have taken on so much mortgage debt that if prices merely stop rising, they're going to find themselves under water. And the broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock."
The Wall Street Journal has this report on mortgage loan resets. “Millions of Americans who stretched themselves financially to buy homes face a painful adjustment, some could even lose their houses, as monthly payments on adjustable-rate mortgages are reset higher. More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007.”
Thats a lot of escalades!
"Almost a third of new mortgages in 2004 and '05 were at adjustable rates (because the initial payments are lower than on fixed-rate loans). At earlier peaks interest rates were near cyclical highs, but the past few years have seen the lowest interest rates in a generation. So adjustable mortgages are likely to adjust only one way: Up."
“Rather than face those big jumps, many borrowers will refinance into new 2/28 loans, Grant Bailey, a director at Fitch Ratings believes. Currently, they could get an initial rate of about 8% to 8.5% on a new loan."
"A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan.”
‘But that goal is rarely realized,’ says (mortgage broker) Daniel H. Jacobs."
Right, debt = wealth and as long as they CAN refinance, they will. They don't refi to save, they refi to have more to spend.
"Some borrowers who have taken on lots more credit-card debt and whose homes haven’t appreciated as much as expected may not be able to qualify for a new loan. Because their debt costs would be so high in relation to their income and because they can’t extract cash from their home equity, they may not qualify for refinancing. That means meeting the higher payments on the original loan or facing foreclosure.”
What a concept!!! You mean actually PAY for what they bought? That will go over about as well as a turd in a punchbowl. The masses won't stand for it. They will probably try to get legislation passed to prevent people like them from being held accountable for their own debts.
"As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms, he notes, adding: ‘At some point, people are going to have to pay the piper.’”
As long as I don't have to pay their piper, this will be fine.
"Turnover of new and existing houses in the third quarter of last year was more than 16 percent of GDP, way above its long-term average of 9 to 10 percent, and easily beating the levels reached in the housing frenzies of the 1970s and '80s."
"It's equal to almost 40 percent of the growth in personal spending, and a nice compensation for the failure of the economy to generate new jobs at a vigorous pace. But since we're saving nothing these days--the personal savings rate went negative in 2005 for the first time since the Great Depression--the cash had to come from abroad. Since 2001 US foreign debt has increased by a stunning $2 trillion."
"(Wall Street economists estimate that 40 to 50 percent of the growth in GDP and employment over the last several years has been driven by the housing boom.)"
"In the third quarter of 2005, the average new house sold in the United States cost 4.9 times the average household's yearly income, up from 3.9 in the late 1990s and eclipsing the previous record of 4.3 set in 1989."
"Housing inflation is the American national religion," as the late market pundit Ed Hart of the late Financial News Network used to say.
But look out the window Virginia... what do you see?
"The housing market is cooling, making it harder to sell homes or build up a cushion of home equity. Regulators are pressing lenders to tighten their lending standards, which probably will make it more difficult for some people to qualify for refinancing.”
"The housing market isn't like the stock market; it's a lot slower, and its harder to dump one's house in a panic than 1,000 shares of Pets.com."
“A recent study projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.”
"Looks like the housing religion is on the verge of a crisis of faith."