Posted by FlaMac on 3/24/06 7:46am
Msg #108286
2006 Refi projection from the Wall St. Journal...........
Might be "good" news for us as many borrower's are now realizing they didn't get a good deal the first time around and will refinance again once thier fixed rate expires......for those BO's who have taken advantage of the time frame to improve thier credit score, that is..the other's appear to be faced with possible foreclosure.
By JAMES R. HAGERTY, The Wall Street Journal
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.
In the hot housing market of recent years, many households took advantage of "affordability" mortgage loans -- heavily promoted by lenders -- that hold down payments for an initial period. Now the initial periods are coming to an end on many of these loans, leaving borrowers to face resets of their interest rates that can cause monthly payments to shoot up between 10% and 50%.
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, estimates Moody's Economy.com, a research firm in West Chester, Pa.
Most borrowers will be able to cope with the coming wave of resets, in some cases by refinancing with new loans, lenders and mortgage industry analysts say. But some borrowers will have trouble meeting the higher payments and may be forced to sell their homes or could lose their homes to foreclosures. A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.
Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, Santa Ana, Calif., plays down the threat to the economy as a whole from resets. He figures most borrowers who bought their homes or most recently refinanced before 2004 are in good shape. That's because the surge of home prices in most parts of the country lifted the values of their houses well above the amounts due on loans.
The bigger risk is with people who bought homes more recently and haven't yet benefited from lots of price appreciation -- and, in some cases, won't necessarily benefit at all because their local markets are cooling. For a study released in February, Dr. Cagan examined adjustable-rate first mortgage loans made in 2004 and 2005, including refinancings. He figures about 7.7 million of these loans are outstanding, representing $1.888 trillion of debt.
About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to strain their finances.
Assuming that home prices stay around current levels and interest rates don't rise sharply, Dr. Cagan figures about one million households eventually will default and lose their homes to foreclosure. That would cause about $110 billion of losses for lenders, he says.
Lenders and the economy as a whole could easily cope with such losses, Dr. Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. "It won't happen all at once," Dr. Cagan says. "It will be spread out over several years."
Such wild cards as interest rates and home prices could throw off the projection. If interest rates shoot upward and home prices fall, the number of foreclosures could be much higher than Dr. Cagan's scenario foresees. If interest rates decline and home prices surge, the damage would be less.
Assuming economic growth remains healthy, foreclosures are likely to increase only "modestly" from the current pace, says Doug Duncan, chief economist at the Mortgage Bankers Association. He says job losses -- not resets -- are the biggest cause of foreclosures.
Subprime borrowers, those with weak credit records, are most at risk. In the past few years, many subprime borrowers held down their initial costs by using so-called 2/28 loans, whose rates are fixed at a relatively attractive rate for the first two years.
A typical subprime borrower who took out a 2/28 mortgage in 2004 has been paying interest of 7.1% for the first two years, says Grant Bailey, a director at Fitch Ratings in New York. Once that introductory period ends, the interest rate is reset every six months for the remaining 28 years of the loan at a margin over interbank rates, the rates banks charge one another for short-term money.
The 2/28 loans generally limit the size of the first jump in rates to around three percentage points. That would bring the monthly rate to 10.1%. Monthly payments for a borrower with a loan of about $150,000 would rise to about $1,315 from $1,000. Assuming interest rates stay around current levels, the rate would jump again to about 11% within six months to a year, bringing the monthly payment to $1,400, or 40% higher than the initial payment. Borrowers who chose loans that allow them to pay only the interest for an initial period, deferring principal payments, face even bigger increases -- more than 50% in some cases.
Choosing to Refinance
Rather than face those big jumps, many borrowers will refinance into new 2/28 loans, Mr. Bailey believes. Currently, they could get an initial rate of about 8% to 8.5% on a new loan.
But that won't be possible for some borrowers who have taken on lots more credit-card debt and whose homes haven't appreciated as much as expected. 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.
"The ones who get stuck are probably going to be the ones who needed to refinance the most," Mr. Bailey says.
Even those who do refinance into a new 2/28 loan won't necessarily be in the clear because they still face an eventual reset, and refinancing typically costs thousands of dollars in fees, which often are rolled into the 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 Daniel H. Jacobs, chief executive officer of 1st Metropolitan Mortgage, Charlotte, N.C. 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."
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