Interest Only Mortgages

Our discussion of Interest Only Mortgages this morning was incomplete without an accompanying  graph.

Here is the accompanying map from NYT:

click for larger map


Thank to the NYT for their invaluable assistance.


Eyes Fixed on Your Variable-Rate Mortgage

NYTimes, July
15, 2006

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What's been said:

Discussions found on the web:
  1. scorpio commented on Jul 17

    thot foiks in Boulder had more sense

  2. Gary Anderson commented on Jul 17

    It is interesting that this is a smaller percentage than those adjustables being underwritten in 2004 and 2005. This map will get darker as the years progress.

  3. saltwater commented on Jul 17

    Hey Pete….. any idea on AK’s numbers?

  4. ElamBend commented on Jul 17

    I expected higher percentages on the coasts and in pockets of fast growth, but what’s in the water in Atlanta?! Hotlanta is going to be Brokelanta.

  5. Alaskan Pete commented on Jul 17

    Saltwater: No idea. Salaries in AK are well above the natl avg, taxes are very low (no state income, no sales tax except within some city limits). So I would expect less than natl average of exotic loans.

    That said, home prices here (Fairbanks) are ridiculous, roughly equal to what you would pay in pricier parts of Seattle or Portland, but for inferior products. So there is a potential affordability element. I just haven’t seen any data I can recall on our market.

    Barry: Looks like you got linked by one of the giant political sites again…”Atrios”. He also linked to you a couple of days ago. I’d be curious to see what your traffic stats look like after he links compared to normal traffic.

  6. epoh commented on Jul 17

    S’up with all the Santa Bankruptia in Cally?

  7. Steve Goulet commented on Jul 17

    FYI, not all interest only loans are adjustable rate or variable rate. I should know, I have an interest only option and it’s a fixed rate at 6.0 for 30 years. Therefore the data cited above might not be worth much depending on just what you’re trying to get out of it.

  8. Michael C. commented on Jul 17

    It’s true that IO and ARM loans will put pressure on home prices in the future. But I think the underlying pressure has to also be measured, and that underlying pressure is what % of monthly income is going toward mortgage payments.

    For example, I know of a few individuals who could have paid all cash for their homes, but chose to take advantage of the ultra liquid rates. They understand that in the near future they will need to refi and will be comfortable in doing so. This is in contrast to someone who is 100% LTV who takes out an IO/ARM and doles out a large portion of their income to monthly payments.

    So the true underlying debt/income burden has to be taken into account. We can’t hang everything up to the fact that IO/ARMs are bad bad bad and mean crash crash crash.

  9. jon commented on Jul 17

    are these 1st or second (vacation, investment) homes? does that matter?

  10. Joe commented on Jul 17

    this graph doesn’t tell us if these ARM’s are 3, 5, 7, or 10 years, so it is hard to tell just how many loans are coming up soon, and how many are further out there.

  11. Massimo commented on Jul 17

    There is nothing wrong with interest only or other types of “non-conventional” financing. This type of financing is bullish.

    Bullish not just on the housing market and economy, but also bullish on the person who assumes this loan.

    A borrower in their mid 30’s to early 50’s is in his/her prime earrning years and expects to increase their income not decrease it every year. So, it is a positive sign.

    Persons on fixed income and elderly should not accept this type of financing.

  12. CDizzle commented on Jul 17

    There’s nothing wrong with this type of financing becoming more common. There is also nothing wrong with mortgage delinquincies and foreclosures rising…it’s all part of a cycle…or call it something else if you have an aversion to the word cycle. Just like there was nothing wrong with the S&P 500 trading at 44 times earnings in Q1 of 2000.

    I don’t think anyone is saying that anyone in particular is in over their head. However, the increasing rate (and increase in the rate of increase) of these mortgage products are reflective of a populace that, in my opinion, is myopic where rates/unemployment/economic prosperity is concerned.

    Oops, that’s leading me right back to that whole cycle thingy again.

  13. ss commented on Jul 17

    This data , while “factual” is (negative) hype. What gets no press in these debt avalanche articles, is the obvious step these debtors will take when “teaser” rates rise — you re-finance to another “teaser” rate. There is plenty of cheap credit available…you just have to look. How many 0%, 1 year credit card offers have you gotten this month?

    American comsumers will slow down…but won’t collapse, imho.

  14. jab commented on Jul 17

    ElamBend – Atlanta has a high degree of people that move in and out – live there for short periods of time so this type of financing may have been more attractive in Atlanta.

    Michael C -The people you know that could have paid cash are in the extreme minority.

    Joe – Most interest rates are locked only for the first couple of years and then reset annually with a fixed cap on how much they can rise each year – usually 2%.

    Massimo – I hope you are being sarcastic – If not the future will prove you wrong.

    I spent 5 years recently as a corporate controller for a large homebuilder (with an in house mortgage company). I could write for a week describing the how much trouble many people are in for. Many people try to explain things away and that there will be a soft landing. I can promise you it will not be soft. It will vary by location but it will vary from bad to worse. Have you not wondered how all these people can afford these huge homes that are being built? Creative financing has gotten out of control and lending standards have become non-existent. People do NOT look at the prices – they only care about the payment – this is the key to understanding why people have gotten into this situation. People are trying to get the most house they possibly can afford and were getting 3% interest only loans to do it (some even negative amortization loans) now over the next couple of years that interest rate will reset a couple of times to lets say 6-7%. That means more or less the mortgage payment will double! Most of these people were stretched to get in with the original payment. There is no way most can afford the new mortgage payment. This will 1 – slow the economy tremendously. 2 – greatly increase the home on the market which will 3 – push prices down and it will take years to digest this so they will not bounce back quick. Finally think about who is holding the mortgages….. It is not who you think …. Many have been sold off by the mortgage companies in the form of collateralized bonds. The buyers have been mutual funds and pension funds – be careful what is in your bond fund. In addition look closely at your money market …. Does it hold “US Bonds” … sound secure doesn’t it … but look closely it likely refers to Fannie Mae Debt … which are all these mortgages that are out there …. This is not secured or guaranteed…. if there is a wave of bad debts these money markets could lose principal! I really feel bad for the old people that have their savings in what they think is a safe money market account living on the meager interest and then they may very well lose a significant portion of their principal unless uncle sam bails the whole thing out which would be ALOT more than the S&L crisis. I will end it here but I could go on and on and on.

  15. ss commented on Jul 17


    No debtor intends to sit back and let their mtg double. Mtg brokes/banks will be fighting tooth and nail for the re-finance business. You may not like the “mtg kiting” idea, but it makes sound financial sense. I would also like to see more data on actual debt service coverage on Americans. I suspect it’s a whole lot less in comparison to the nintey’s.

    Oh, and long term rates have peaked!

  16. C-Money commented on Jul 17


    “Oh, and long term rates have peaked!”

    How did you come to that conclusion? Or are you being facetious?

  17. Alaskan_Pete commented on Jul 17


    Debt service as measured by the FED’s “Financial Obligation Ratio (FOR)” is at all time high levels. The mortgage component therein is already at an all time high level before the onslaught of ARM re-sets.

    Additionally, the PCE (personal consumption expenditures) as a % of disposable income, is at 50 year highs.

    Mail me some of that good weed you’re smokin, partner.

  18. ss commented on Jul 17


    I come to that conclusion from many fronts. Technically, the 10 yr yield has held the long term downtrend dating back to the ’95 peak.

    Next look at what the “adults” or smart money is doing. Looking at the Commitment of Traders we clearly see the “commercials” (smart money) have been VERY long bonds…to the tune of several standard deviations long. My money is on them. Bears have been arm waving about 6+ % rates for years….and have been wrong.

    Next look at any of the leading economic indicators. ECRI’s FIG (future inflation guage) and Indusrtrial Production indicators are falling, since Feb.

    Q.E.D….rates have peaked, imho.

  19. Leisa commented on Jul 17

    SS: I’m not quite sure that I’m following your logic. If the rates are adjusting higher because the market rates are higher (because the Fed rate to banks are higher is higher), then I would surmise that the clamoring of the mortgage bankers might be dampened a bit. There’s also a matter of the underlying value. If the housing values are dropping and the LTV ratio on the old loan was high, there might be a small problem qualifying for a loan.

    I think that it is fair to say that with rates rising and home values flattening–that to expect the consumer to continue to belly up to the consumption bar and order 24 oz beers is optimistic. I think that the consumer will still order beers, but they will be 12 oz. beers,

    JAB: Great comments.

    There was this terrific article over at the For any wanting another view of consumer debt and net worth and what that might mean, I recommend this article.

  20. ss commented on Jul 17

    Petie…my boy.

    And where is net worth, on a 50 year look.

    Yes, at record levels.

    Here’s the FOR data…it is up ~ 2.9% since 2000. It has been rising since they started keeping track in 1980…This is your argument?

    Spare the lame Cheech & Chong humor please.

  21. ss commented on Jul 17


    You make a fair point on LTV. I’m not suggesting there are not individuals out there that aren’t stretched…the marginal players that buy anything at the top (leveraged) will get burned. I’m saying these gloom and doom articles data mine to suit their stance/argument/book. It’s RARELY as good, or bad as it looks. These guys like prudent bear have predicted 50 of the last 2 crashes.

    The consumer will slow down…but won’t collapse. What we need to discuss is the more important Corp spending…Cap Ex….Corp balance sheets have NEVER been healthier (thanks to the Re-Patriation Act of last year). They will pick up the slack of the comsumer, imho.

  22. Cherry commented on Jul 17

    ss, your a mumbling fool. They are NOT going to pick up a “consumer” slowdown, because those “healthy” numbers themselves are going to fall.

    Denial hurts man, your pathetic show is over.

  23. Richard commented on Jul 17

    ss, i disagree the corps will pick up the consumer slack. the housing market has appeared to of hit a wall a couple of months ago, at least here in the NE. consumers drive most of the economy. when they stop puttin up and decide to shut up, everything else will go.

    you quoted net worth has never been higher? how much of that has to do with housing stock?

  24. Leisa commented on Jul 17

    SS: I’ve heard this refrain about corporate purchasing power filling in for the consumer–and I believed in it for about 60 days. Today, I’m a skeptic.. Capex projects get the ax as soon as corps get a whiff of smoke in their customers buying habits. I’m not trying to argue the point, but I merely point out that the refrain doesn’t make much sense to me (and I say that from a financial executive perspective). I’d also note that coporations have been spending their hard earned cash in propping up their stock price by buying stock. I’m taking a wait and see approach, and I don’t pretend to have any special knowledge. But with all of the forecasted softness, you can bet that some hard-scrapple CFO is going to be culling through every capex project and nixing those that are discretionary as opposed to mandatory.

  25. whipsaw commented on Jul 17

    per jab:
    “ElamBend – Atlanta has a high degree of people that move in and out – live there for short periods of time so this type of financing may have been more attractive in Atlanta.”

    I’ve lived in Atlanta my entire life and never considered the population any more or less prone to move than those of Dallas, Miami, etc. so I can’t buy that explanation for the astounding differential. Nor can I see that there is a significant difference in the income/housing cost ratio or relative appreciation rates that might encourage this kind of bubble lending which apparently extends to Athens as well. If anything, house prices have never gotten insanely out of line here compared to a lot of other places while incomes have been favorably comparable.

    The only thing that I can suggest is that unlike what I have been reading here, real estate lending in Georgia has never been “without recourse” and there is a statutory process for obtaining a deficiency judgment after sale at foreclosure that is essentially a stacked deck in favor of the lender. It may be that the lenders simply anticipated that their lobbying/bribery efforts regarding bankruptcy “reform” would come to fruition so that they could take back the property, sell it at a profit later, yet still hound the debtors for a decade.

    But it’s interesting to know that we apparently have a higher percentage of timebomb mortgages than anyone else. The last time real estate collapsed around here, it was pretty ugly and that was also due in part to “creative financing.”

    I’m not sure what is shaping SS’ view of all of this, but he or she sounds like somebody whistling past the graveyard. Lenders are not going to fall all over themselves to refinance somebody who can’t afford his current loan even if values don’t decline. You could probably find financing in the subprime market, but that’s just “deferred default.”

    But here’s a hot tip for you shrewd investors- once the squeeze starts, you can expect a remarkable number of homes to be lost to fire, so maybe the fire carriers are not a great choice.

  26. Bob A commented on Jul 17

    Again SS and others who live in the fantasy world of optimism. Why is a guy who is broke going to continue paying an interest only $5000/month payment to live in a house he could rent for $2500/month when the house is going down in value (and the whole justification for buying the house, speculation that it would increase in value beyond the difference in fair rent and interest payments, is gone).

  27. Jim commented on Jul 17

    The Florida market popping as I write, many developments on the East and West coast have already cut prices 10-20 percent, are giving away new cars, gas, food, anything to get people to purchase the new cookie cutter crap they are selling.

    The housing crash in my opinion is just underway as builders pull permits many months in advance. 2007 we will see 2003 housing prices. Not to mention record foreclosures and illegal unemployment.

  28. whipsaw commented on Jul 17

    “The Florida market popping as I write, many developments on the East and West coast have already cut prices 10-20 percent, are giving away new cars, gas, food, anything to get people to purchase the new cookie cutter crap they are selling.”

    Around Atlanta, the “From the 400’s” signs are being replaced by “From the 360’s.” This is not too hard to figure out unless your neck is already in the noose.

  29. Espumoso commented on Jul 17

    Stumbled on this site via Atrios and have some questions.

    What are your opinions on markets like San Francisco where there are both housing and rental shortages? I.e., there are no cookie-cutter-californication developments creating a new supply of homes/rentals.

    Here in SF rents are rising and housing is cooling, but given that there is a shortage of housing at all levels, especially those with moderate incomes, will the coming ARMs have a huge impact on prices in such a market? I’ve always thought that niche markets like SF would be somewhat resistant to the larger corrections that are probable in places where new construction can actually occur.

    We’re ready to buy and are considering either 7/1 or 10/1 ARMS both fully amortized or IO. We can afford either, but since we won’t stay in the flat for more than 5-7 years we’re not sure whether it is worth paying down a tiny amount of principle over those first 5 years.

  30. Lord commented on Jul 17

    All highly leveraged areas are at risk when a recession occurs. Those without assets or income to sustain themselves have little choice but to sell when everyone else is afraid or unable to buy. They can’t refinance without equity or income. Pricing in coastal zones is predicated on appreciation. When that fails pricing heads down and buyers wait. When large numbers lose their jobs, pricing can fall 50% in real terms. It depends on the timing of the next recession and whether job loss significantly effects the area.

  31. CDizzle commented on Jul 18

    I agree with Jab. I live in St. Louis which is widely (and rightly so) regarded as a well-insulated, low-growth, highly stable economy. I have been a commercial loan approver for the past 3 years for an S&P 500 bank.

    Everyone is building/rehabbing. The metro market has been pushed out (literally) to pasture to develop land for SF subdivisions. Prices for communities an hour from the Arch rivaled those in St. Louis County. Now gas is $3 a gallon, the Ford and GM plants are going to close in the next 3 years but geewhiz if everyone doesn’t have a GMC Yukon in the driveway…next to the sign containing their realtor’s contact information. The realtor who ran down the list of beers on tap for me at the local watering hole prior to handing me her Coldwell Banker card. Seriously.

    hehehe, I just reminded myself of Will Hunting at the end of his government “think tank” interview.

    Gonna get rough, kids.

  32. loompa commented on Jul 18

    I just happened on this blog by circumstance. You guys are scaring me poopless! I’m not savvy in the world of mortgage and finance and what-not, so have no idea who is speaking truth and who is blowing stinky air out of their backside.

    Nevertheless, I am shaking in my boots. Are people really so materialistic that they risk their future in order to get a house bigger than the Jonses??? I don’t say that from a “holier than thou” attitude because I certainly ain’t no saint, but this type of action really seems extreme to me.

    I have always endeavored to 1: pay all bills on time, 2: pay off the full balance on my credit card statement each month, 3: pay extra principal on my mortgage monthly, and 4: contribute what I can afford to a retirement fund. Of course, this tact has not afforded me a lot of luxuries in life, but I do have a roof over my head and a full tummy. Shouldn’t that be enough? I have to admit that sometimes, especially when comparing myself to those dang Joneses, it sure doesn’t feel like it.

    So here is a question for you savvy financiers: Am I screwing myself by trying to pay off a 30 year mortgage in 10 years? I just balk at the prospect of all that interest I would have to pay over the course of 30 years. Am I also screwing myself by trying to maintain some semblance of being a “debt minimalist” (yes, I made that up – told you I wasn’t savvy in the world of finance). Creditors do make it SO easy to borrow money these days.

    Advice and opinions are most welcome!

  33. wp commented on Jul 18


    rent for a year or 2 ( or 3) …. you’ll have many chances to buy on the cheap

  34. CDizzle commented on Jul 18

    Loompa, you are not screwing yourself, imho. You are following a set of practices that used to be the accepted norm. At some point in my lifetime, people stopped accepting that set, by and large. Barry put up a topic recently which referred to an article wherein the author stated that people’s materialism (and I’m paraphrasing) and drive for ‘stuff’ correlated strongly with their self-esteem and/or view of themselves. It’s, again imho, a substitution of reality in favor of appearance.

    You embrace something that millions of others have eschewed: it’s STILL all about the long run, baby.

    Again, just my two cents.

  35. Rusty commented on Jul 18

    Just to add to what whipsaw was saying about the Atlanta market – it is in large part due to state lending regulations. Atlanta is far less transient than a lot of metro areas, like DC or LA.

    Also, I believe I read somewhere that it is the largest single family home market in the country – it is hugely sprawling with no checks on development, so cookie cutter suburbs are a higher proportion here than most metro areas. These developments are “disposable” housing – live there for 3-5 years, then move to another new house further out.

    So the massive amount of new homes being built here has a domino effect on sales. New arrivals to Atlanta are typically young college grads who rent apartments, then buy condos or houses, then have families and start moving up, etc. This cycle here can lead to 3-4 house resales for every new house built, as buyers backfill each other, which means there is a lot of turnover and thus a lot of activity in the past 3 years, when ARMs really took off.

  36. ToDur commented on Jul 18

    Yeah, what’s up with Atlanta? I thought the market was a real estate laggard?

  37. jkw commented on Jul 18


    You are not screwing yourself by paying off debt as quickly as you can. However, it is not necessarily to your advantage to pay off low-interest debt. Paying off your debts quickly is easy to manage if you have the money and will not cause any problems. If you are willing to go through extra trouble, you can make money by borrowing at low rates and saving at high rates.

    For example, I have almost $20k in student loans at below 3%. I could pay them off in full now, but I would rather leave the money in I-bonds and bank accounts earning an average of about 5%. If my average interest rate goes up to about 8%, then the interest will be enough to pay off the loans, leaving me with the principle when I am done. I also have about $15k in 0% credit card debt that I am earning about 5% on. It’s not much, but why turn down $1k/year of almost free money. The trick is that I have to pay 6 credit card bills every month and there will be a huge penalty if I am late on even 1 of them. If you are organized and at least temporarily don’t care about your credit score, taking out low-rate loans can be profitable. But do not do this if you will be tempted to spend the money or if you aren’t sure that you can manage to pay all the bills every month. Taking out loans with a teaser intro rate and spending the money is a good way to ruin your finances. You shouldn’t put credit card loans into anything less safe than a government-guaranteed account (T-Bills, FDIC, or NCUA).

    So you will not ruin yourself by paying off your debts as quickly as you can afford to. But you may be better off if you don’t. It depends on what interest rates your loans are at and where you expect interest rates to be in the future. And it depends on how willing you are to have debts matched by savings. You should probably also have at least 6 months worth of expenses saved up even if you are losing money on the interest differential. Pre-payment doesn’t give you the option of not paying your mortgage for a few months if you lose your job. Having an emergency fund that you will only use if you lose your job temporarily covers the cash-flow problems.

  38. Wild West commented on Jul 18

    Interesting posts. I’ve been saving and trying to buy a house now for over a year. I don’t have a lot of money and don’t want to get in over my head. I’ve been looking at houses under 100,000. Yes, they still exist, but usually by the time I find one I like, some speculator has bought it up for cash. I’ve have just about given up, and plan to sign another years lease and save more for the down payment.

    My question: Does anyone know much about the Fort Worth market? We had over 60,000 people move to Tarrant County last year alone. From my perspective the real estate market is dog eat dog down here, but everyone keeps saying it is a buyers market? And maybe it is in the suburbs at 200,000 plus, but it sure isn’t in the inner city… Any thoughts/advise?

  39. Bob A commented on Jul 18

    loompa. In recent years many people have been buying as much house as they could afford, based on what they earn, because the more house you bought, the more you could make on speculative appreciation. that has been the driving force behind much of the runup in prices. In addition, 1) people could afford more house because of lower interest rates, it because cheaper to buy than rent and 3) lending standards changed dramatically making it possible for almost anybody to buy a home with 0 down by getting 80/20 mortgages. These factors increased demand dramatically, adding fuel to the fire. With higher/normal interest rates, things have changed again. It is again cheaper to rent than buy, prices are falling or stable so there is no longer a high probability of short term speculative appreciation.

  40. Mike commented on Jul 18

    Loompa. I make my living in the financial world and there are certain rules which work 99% of the time. The rules for buying property or stocks are quite simple. When a bubble appears the same ending always happens (a bust) but the time frames vary. With stocks, they can be sold quickly. Thus, a stock market bubble deflates rapidly when compared to property market bubble (as in 2000) which takes much longer. BTW, I’m 70 years old and I’ve seen several “bubbles” and I can tell you one thing for certain. It’s NEVER “different this time”.

    Let’s talk property. Like stocks, you should NEVER listen to those who have a vested interest in selling or buying or promoting. If a realtor tells you that, “The price on this house can only go up,” ask them to predict a time frame (without a smile on your lips) and guarantee that if the property loses value over that period, THEY will cover the depreciation. Of course, you want it in writing. NEVER be nice to realtors. Be cordial but remember that realtors are nothing more than used car salespeople.

    Now, how can you judge the value (current) of property. Very simple. Ask around the area you are living in what the average rents are fetching. Example: If the “average” rent is $2,000, then the value of property in that area is $400,000. If the average current value is $600,000, then the values in that area are $200,000 OVER valued and, over a period of several years (usually 18 to 20 quarters) the value of property in that area WILL revert to around $400,000. Remember, like buying stocks, it’s sheer luck if you buy dead on at the bottom OR sell exactly at the top.

    Currently, we are in a “bubble” which is not just bloated. It’s scary. Here’s a bigger look at the financial future. The US is basically bankrupt. It only sustains itself financially by sucking in money from other countries. It can only suck in money by offering high interest rates. Foreign investors are slightly wary of a nation which is bankrupt but they will invest if they get a good return. In other words, those freaky low interest rates are NOT coming back. A lot of mortgages aere going to reset and a lot of people (mostly those who bought property from 2003 to now) are going to see their property values go negative. Some will handle it. Many will not. They will walk because many of these people (helped by corrupt mortgage brokers and appraisers working hand in glove) were not credit worthy. Many had a long history of defaulting on loans. If they see they can rent for less than their mortgage and property tax payments (to say nothing of property repairs) they will simply walk away. Want more. Builders are still building!! Masses of unfinished properties will arrive on the market in many places. Builders bought land cheap and have VERY wide financial margins. They will sell for less than other owner/occupiers in the area and in doing so will drive down prices. Like stocks, property has support and resistance levels. We have hit serious resistance at this juncture. Prices will head down to support. Dip buyers will move in and get caught if fundementals have not been reached. Taking the example of the $600,000 property only worth $400,000, it means that property will find support (via dip buyers) at, say, $500,000. The price might rise to $525,000 as the greater fools (helped by realtors) jump in. Resistance might come at $550,000. Then the price drops but, in all likely hood, will drop through the support mark ($500,000) and find a new support at, say, $475,000. Then the cycle starts again. Price hits the old support price (which has now become resistance) of $500,000 and falls again. It breaks thru $475,000 and drops to $450,000, etc, etc, etc. When (as a famous stock market trader once remarked) there is, “blood on the streets”, THEN you buy. The secret is knowledge and patience. If you can rent cheaply, stay put for a few years. 2008-2009 could be interesting.

  41. lalaland commented on Jul 18

    Brilliant post, Mike. You nailed it.

  42. alex commented on Jul 18

    Loompa, if you have 6-12 months of living expenses in the bank, keep paying off the debt early. I’m still overpaying my mortgage, but if CD rates go up a little more, it will make more sense for me to put the money in the bank than pay off the mortgage.

  43. ss commented on Jul 18

    Pass the Guns and Butter please. ;o()

  44. Geoff commented on Jul 18

    Let’s review.

    Population growth weakening, and could weaken further given the anti-immigration bias. Household growth slowing. Job growth below labor force growth, and slowing. Wage growth barely keeping up with inflation. Interest rates rising, and the likelihood of a decline rather small given our current financing requirements re the deficits. Fiscal situation deteriorating, due to Alt Minim Tax fix, war spending, and the coming boomer retirement wave, which will bankrupt medicare by 2018. So in all likeliness, taxes are going to rise, and that wont help consumers much. It wont happen til after 08, but its going to have to happen. These are not deficits we can grow our way out of.

    On to the consumer – debt burdens at record levels, and rising, and mortgage resets coming this year from 03, which is a nasty wave to start with, wont crest until 2009. Take a look at that chart at the start. The IO mortgage penetration in those bubble markets reached nearly 60% last year, nearly three times the rate in 03. So we have years of resets coming, and pretty much a guarantee of considerably higher rates for the first two years of resets. So, consumers have about zero upside. There is no way they will be able to continue to buy houses at the rate they did before, even if mortgage lending standards stay as loose as they are now, which, btw, they are actually LOOSENING, perversely, as desperate lenders fightt for market share. This will end soon too, because as these bad loans start to hit, capital requriements will increase and lending standards tighten. So now, will the bubble just starting to deflate, forclosure rates just starting to head up, and vulture buyers already having a hard time finding deals as many of the homes have no equity in them.

    For anyone who thinks that the IO loan and neg equity loan is just for saavy buyers, think again. Many of these people werent covering interest. This is not saavy, its desperate.

    Prices are already coming down, and financing costs rising. Rents are rising slowly, but not enough to make the investor jump back into the market. So investor demand is toast for a while. Now, if prices keep falling, all those 2nd home purchases of the last few years could start finding their way back onto the market as the “sure bet” looks like maybe it wasnt such a sure thing.

    So, do the math, a little simple supply and demand. Supply is increasing from the emptying of the builder pipeline, with many more homes still to hit the market. Foreclosures are risnig fast, pushing up stock. Investments are possibly going to be pushed back onto the market soon as people try to lock their gains. And home supply will increase from people trying to get out from under a mortgagte they cant afford, and trade down. So much for supply.

    Demand – none from investors soon, as market psychology continues to move from denial to acceptance that the game is up. Financing costs rising as lending standards tighten, and rates rise. Not a lot of upside here. Rising rents helps, and as prices fall, eventually investors step back in, but this is a long way off, since they dumb ones havent even left the market yet.

    For the fun of it, try plotting the nasdaq from 93-01, vs existing home sales from 98-06. Its rather amusing. If the bubble sales level reverts to a normal level, we’d be looking at about 4.7 mil homes sold a year, vs. 7 mil. Think about what that would do to inventory and months supply.

  45. Mike commented on Jul 18

    Yes. The stock market gives great insight into how “those in the know” manipulate the economy of the USA. If one looks at the charts of home builders like RYL, or BZH or DHI, etc, you can actually track how those in the know switched their assets (leaving those NOT in the know in the dust) from the stock market to property around 2001, thus creating another bubble (which they got into early) so that the suckers (Joe Sixpack) helped inflate.

    Example: BZH home builders stock price in June 2000 was $6. In December 2005 it was $82. Of course, now the bubble is leaking, the stock price is $38 and STILL dropping. Conversely, the QQQQ tech stock (Naz 100) was $120 in 2000 and declined (going in the opposite direction to the home builders) to $20 within 2 years. Stock prices sink faster than home prices. About that time the home builders REALLY took off. Of course, the smart money was already in at $6. Now they are OUT of the home builders. What’s the next “bubble”……..I’m still watching and waiting!

    It’s that simple. Control and keeping the status quo of Assets is the name of the game. Total US assets were decimated to the tune of several trillion $ by the stock market (tech) meltdown. In order to regain those assets, Washington’s financial manipulator and hack (Alan Greenspan) dropped the interest rates, thus allowing Joe Sixpack to jump into the property bubble. Interesting how he got out as it started to pop. For several years, if you had a pulse you got a loan.

    Now a lot of Joe Sixpacks are going to get their financial clocks cleaned and the next bubble will start to inflate. It doesn’t happen straight away but it WILL happen and only those who are in the know or savvy enough to recognize it and get in early (and out at the right time) will make money. As far as property is concerned, I think the top was in around June thru Oct of 2005. These things are not an exact science so greater fools keep buying as the bubble is pumped up to breaking point but the air started leaking out last year.

  46. Geoff commented on Jul 20

    OK, so here is the poop on Sec reg AB. I guess you are saying that the new disclosure rules have scared the bejesus out of (?) because of the transparency of how many of these securitized mortgage deals are in trouble? Or…? What ARE you saying? Is your reasoning that somhow this regulation slowed demand, by tightening financing, or? I just dont see the effect here. Please explain. Inventory numbers grew because demand started drying up, but also because as price growth petered out, people started putting homes up for sale (top of market effect) and also because some are being forced out as rates adjust on their ARM. I dont think anyone is having any trouble selling off their loans to the secondary market, so I doubt that has been an issue causing anyone not to lend.

  47. loompa commented on Jul 21

    A huge THANKS to everyone who chimed in on my questions and concerns.
    Thank you, thank you, thank you.

    I did ask a financial consultant basically the same thing I posted here. He said that I should do an analysis of the tax savings I’m receiving on my Schedule A for mortgage interest vs. the interest I’m losing by sinking extra money into the principle. This made sense to me. What do all of you think?
    A little detail on my situation may give you better insights. I am 5 years into a 30 year mortgage and my interest rate is 7.375%. My mortgage in under $100k. I estimate that I am still in a better position paying extra at this point since I am still early in the mortgage and paying mostly interest.

    CDizzle –
    I wholeheartedly agree with your call about people’s drive to create a perception while sacrificing sound judgement. I certainly come from “old school” beliefs in that regard. I hate being in debt, but I’m trying to learn the right balance based on sound financial advice.

    BobA –
    I was definitely stereotyping in complaining that all IO mortgages are entered into for material purposes. I understand now, from reading this thread, that this is also an investment tactic – albeit risky imho.

    jkw –
    your response is exactly in line with what the financial consultant told me. Pay attention to the interest rate and don’t assume that paying off all debt is a financially sound tactic.

    alex –
    I’ve heard that before about having 6-12 months of expenses stashed in the bank. Is that based on planning for the event of losing a job, etc? I’ve wondered what the basis for this action is. Honestly, I don’t have that much stashed away since I’ve been throwing a lot towards mortgage principle. Would it be smarter to back off the mortgage until I have a safety net?

    Mike –
    wow…I’m at a loss for words. It will take me awhile to absorb everything you’ve said. I am taking away from your post, though, that knowledge and patience are the keys. I’d like to add that self-control would also be a helpful trait.

  48. Jason R P commented on Jul 27

    Everyone here seems pretty smart on the Interest only loan. So I have a question.
    My roommate has just aquired an IO for 470,000.00. She put no money down on the house and only brings home 3,200.00 a month. Her monthly morgage is 2,985.00 and that is not including the 200.00 Association fees nor utilities. Which will put her well over her monthly take home. She has about 17,000.00 saved and is counting on the tax write off in April to get her some more money to live on. Now my question is, will she be able to refinance or sell this home with only paying the Interest, Or will this put her into a greater hole then the one I believe she just made? The home is a 2 bed 1 bath condo so I dont believe that it will go up any higher in value anytime soon. I just think she is make a horrible mistake, So if anybody disagrees with me please tell me to ease my concern.

  49. jkw commented on Jul 27

    Real estate is always highly dependant on local factors. However, I don’t think there is much of a chance of selling for a higher price within the next few years anywhere in this country (unless we decide we are going to inflate our way out of debt). If she can still get out of the deal, she should try to. Her options by late next year will be various types of foreclosure unless she finds some more income. She might manage to just lose all of her savings if she goes through with this. More likely, she will lose all of her savings and get a bad credit history. Appraisals will almost certainly come in below the loan value within 6 months, so selling or refinancing will leave her with a large debt. Banks will sometimes “gift” the difference to you, which counts as taxable income (but then you don’t have to pay back the debt to the bank).

    If she wants to keep the place, she should either get another job, get a raise, or find someone to help pay the mortgage. If she is counting on a tax writeoff, she should work out what she thinks her tax liability will be and turn in a new withholding form so that she doesn’t overpay her taxes (this will eliminate her tax return if she does it properly). The advantage is that she will have the money now, instead of getting it when she files her taxes. But don’t underwithhold or you will owe penalties. Tax information is available from the IRS website.

    Assuming she can’t backout of the deal, she already can’t afford to sell the place at the price she bought it for. The best option would probably be renting out the second room. Depending on the rental market, she might be able to rent the place to two or more people and rent a room for herself somewhere else to get positive cash flow. If she is certain about her job stability, she would benefit by putting her savings into paying off the mortgage. It will eventually end up there anyway, and the interest on the mortgage is higher than what she is probably getting on the savings. It will also force her to cut back on her consumption now, rather than later.

    What I don’t understand is how someone that has the discipline to save up $17k got stuck with a 7.6% interest rate on a mortgage. She should have been able to get a 30 year fixed-rate mortgage with a lower payment. Then she could just live on almost nothing until her income goes up without having to worry about when her payments will increase because the interest-only period ends. It would be difficult, but possible. Assuming that she actually has good credit, she could try to refinance right now, but there might be a prepayment penalty on her mortgage that she couldn’t afford.

  50. JJ commented on Feb 27

    Thanks All.
    I am just sitting here at work trying to find out about IO loans. My buddy (seriously not me), just bought a home here in Dallas for roughly 380K. My home is 145K, but with a 30yr 5.5% fixed rate. He keeps telling me that with the IO loan, I could afford his type home. I asked of the consequences from the IO loan and he had none. Obviously, if it sounds to good to be true, it is.
    So, while I have read this entire thread, my question is this : Is the big negative to the IO loan, the period after (5-10yrs) the interest only option is available, is when the mortgage payments come due with a higher interest rate coupled with the principal payment included? So basically, you could live in $$$ home comfortably until the IO period ends? Right?(which it typically tend to be 5-10yrs I see).

    Thanks for the forum itself and everyone’s insight. It is interesting to read into the different thoughts on something that really gets no “what if” pub since there is so much attention (in a positive manner) to obtaining an interest only loan.


  51. Steve B commented on May 1

    Can you get a mortgage with a high amount of credit card debt?

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