Time to bite the home-mortgage bullet

first_img“Every year of human history there has been a war going on somewhere. If you are not in the war you’re OK. If you are, you’ve got a problem.” Defaults, he notes, result from a double whammy. If a borrower faces an unpayable reset, and if the home has little or no equity, a sale or refi is not likely. But a default is. And lots of homes sold in the past several years were purchased with zero down and various types of adjustable loans. Here are some painful examples Cagan worked up as last year wound down. Not surprisingly, the more exotic the product, the nastier the bite will be. Say a buyer used a 1 percent teaser rate loan that gave an initial payment of $964.92. It resets to 6.5 percent and the payment soars 97 percent to $1,896.20. Or a prime market-rate 5 percent adjustable initially requires a monthly payment of $1,610.46. It resets to 6.5 percent and the payment jumps 18 percent to $1,896.20. A subprime loan with an initial 7 percent rate cost $1,995.91 and it resets to 8.5 percent. The payment increases 16 percent to $2,306.74. Cagan also offers some advice, and the key, he says, is “understanding.” Current buyers should understand the features of their mortgage. Different products are right for different people. Current sellers should understand the features of their market. And inventory is the most important factor. Past buyers and sellers should understand their situation and evaluate whether it’s time to refinance. Future buyers and sellers should understand that reset-related foreclosures will come and bring buying opportunities. But not right away. There is something else to understand, too. This is not going to be the kind of market massacre that happened back in the early 1990s. A crumbling economy helped take down that boom market. So far this time, the economy seems to be shrugging off the real estate market slump, which is now more than 15 months old. Cagan also points out that in Los Angeles County, and especially the San Fernando Valley, there is not a huge overhang of new product. “The San Fernando Valley will probably hold up better because they didn’t put condos on every street and fill in every parking lot,” he said. “We’re just in a business cycle.” [email protected] (818) 713-3743160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! He blames what’s coming on toxic, too-good-to-be-true adjustable type loans made over the past couple of years. As these loans reset, mortgage payments will balloon. And this market quit churning out double-digit doses of equity, percentage wise, months ago. It could mean more than 50,000 foreclosures over the next five years. Think of it as a time-release kind of a toothache, with the pain concentrated this year and next. It won’t break the economy, though. And Cagan points out that the negative impact of resetting mortgages will impact a slice of homeowners, thus cushioning the impact on the entire market. Financial pain is coming this year and next. The only uncertainty is its severity. Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, sees this scenario every time he reads the real estate market tea leaves. He drills deep into the numbers relating to home loans made over the past several years and knows that what’s going to happen will have an emotional toll, too. It’s not a pleasant experience to lose your house to foreclosure. last_img read more

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