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Orange County homebuyers have all-but forgotten about the adjustable-rate mortgage.
In November, DataQuick figures show that just 4% of the homes bought using mortgaged were financed with adjustable-rate terms on the first mortgage. Compare November’s results with history:
- That’s easily the lowest on record in DataQuick’s two decades of housing data.
- Since 1988, roughly 45% of all financed O.C. home purchases have been acquired with adjustable mortgages.
- 80% of O.C. buyers were using adjustable deals as recently as June 2005.
- Prior to this year, adjustable-loans’ low use (back to 1988) was 16% in 1998.
If you don’t know, adjustable-rate loans typically offer homebuyers initial cost savings in return for the risk of higher house payments once the discount ends. Many buyers during the recent, ill-fated housing boom were ill-prepared for that payment jolt, and fell into financial distressed when the mortgage costs rose.
Now after waves of bankruptcies to due, in good part, misunderstood adjustable loans, we are seeing serious agnst about these variable deals — both from the public as well as lender who now often qualify borrowers for a loan at those higher undiscounted rates — not based on practices which frequently employed the use of a low-ball teaser payments that are temporary for mortgage qualification.
Scarcity of that adjustable-rate initial discount may be another item hurting pricing of homes. In essence, this trend makes less money available to buy homes as buyers choose to — or are forced to — accept higher payments associated with comparable fixed-rate financing.
Of course, less use of risky, adjustable-loan financing could translate to less foreclosures down the road from home purchases made today!
Other lending news …
- O.C. distressed homes for sale at 10-month low
- Treasury yields seen rising, mortgage rates flat
- O.C. lender with $1 billion in assets files bankruptcy
- Co-founder of once top O.C. subprime lender dies
- Caution urged on mortgages that fund retirement
- Citigroup backs giving bankruptcy judges power over mortgages
- Will bad commercial loans mean more bank failures this year?
- Poll: Should mortgage cramdowns be allowed?
- Calif. foreclosures seen slowing late in 2009
- Quake could balloon Calif. foreclosure woes
- Fed starts buying mortgages
- IndyMac bought for $13.9 billion by private group
- Refinancing can be tricky if your home was recently for sale
Why are there still adjustable reate mortgages?
For the folks that can’t qualify.
There is nothing worng with adjustable mortgages if you know what you are getting into. Keyword “IF”.
If you have a good job and decnt income this shouldn’t be an issue.
The reason the industry got nailed and why adjustables got a bad rap is pure greed. Lenders and brokers pretty much qualified everyone under the sun. You make $20K? Here are the keys to your $400K home! Brilliant!!
Did it make sense? No. Did the brokers and lenders care? No. Why? Because they were too busy cashing their commision checks and fees.
4%? Well that makes sense if you take into account the lower end of the bell curve where people have the lowest intelligence.
People know that the current low Fed-subsidized rates can’t last, and don’t want their ARM to explode later.
Who wouldn’t with the lowest rates in history?
Still WFK, why aren’t more homes above 500K selling like mad right now? Wouldn’t you be clamoring for them if you knew that the rates are probably going to go up? What’s the hold up? Oh, it’s that nasty underwriting problem isn’t it? People actually have to have income and savings don’t they? Well, then I’m sure that their are thousands of potential buyers just waiting for that opportunity to buy that stucco-box in Irvine next to the trash heap and concrete plant for $599K so that they can look out their bedroom window and see right into the all their neighbors homes only 4 feet away. Gee, what’s wrong with these people, can they tell a good deal when they see one?
Another reason there is less use of the ARMs is that the 30 yr fixed rate is virtually the same. Why do a five year ARM when you can lock in virtually the same rate for 30 years. It’s common sense. During the peak years of 2004-5, the ARM rates were substantially lower than the 30 yr rate, hence the spike in the chart above. Not to mention that every unsophisticated over-night mortgage broker was pushing these loans back then because the lower payments helped borrowers qualify for a more expensive home, spiraling home prices higher and higher.
All the financially engineered instruments (ARM, teaser rates, Negative Amortization) that drove the housing bubble are gone. Now we have to use sound fundamentals to qualify for a loan, like a 30 yr fixed mortgage underwritten to actual income at affordable debt-income ratios with and a down payment. Reality is back and prices are going to adjust until we get to a level of affordability that makes sense for everyone. This correction is good for all of us, even those who own homes.
Keep dreaming! Banks are writing 55% ratio loans all day, every day and doing stated with just 30% down.
The ONLY reason to use an ARM right now when fixed rates are as low as 4% is because (1) the purchaser really does intend to sell within the ARM’s fixed rate period (who wants that headache for little to no return or even a loss?) or (2) the purchaser really cannot afford the fixed payment. I am sure there are other reasons why but the validity of them in terms of risk tolerance is probably ridiculous given current low fixed rates. I just loev when you hear mortgage brokers tout the never-ending cycle of refi as a means to save a few bucks in the near term - and the buyer never actually gets to own the damn home - well probably not in 30 yrs anyway. and if so - they most definitely will eventually be paying more in the long term than if they just used the 4.5 % 30yr fixed rate today.
WFIYK: What ratio are you referring to? DTI at 55%?