I was asked by a local reporter recently for some end-of-year thoughts on the New River Valley real estate market, and while I haven’t yet started working on the 4Q report yet, I started to wonder how many loans in the NRV will be resetting in the coming year. Peoples mind might be asking themselves, “ Can I get a loan with bad credit?”
A loan “resets” when its’ initial time period – 1 year, 3 year and 5 years is common – expires and it resets to a different interest rate. Typically, you’ll see resets in Adjustable Rate Mortgages – mortgages that have an initial rate of say 4.5%, and then will reset to a higher (often 2% or more) percentage rate after the initial time period. This is what’s gotten many homeowners around the country in trouble, as their low-interest rate payments have jumped significantly to where they’re now unmanageable. Since the NRV is quite a bit different than the national trends in terms of real estate, I thought I’d ask Brandon Nicely his thoughts on what we should expect to see in 2010. Keep in mind, we’re both cautiously bullish on the market in 2010.
Just to start out so no one is left in a panic: Our area will not see a significant hit with adjustable rate mortgages like some other states especially California. All the talk about ARMS and the fear of more adjustments in 2010 are correct but this is nationally not locally. Currently we are seeing ~ $2 billion per month of option arms recasting or changing the terms of payment on the loan. In 2010 we are going to see $8-10 billion per month start to recast. The majority of these are from California and Arizona, and the big concern here is individuals are not able to refinance do to the sharp decline in property value. When the ARMs adjust and payments start to increase you will see more foreclosures.
Business Week came out with a chart that shows how Pay Option ARMS will be recasting over the next few years:
To give you an idea of what happens with a Option ARM, here is an example on a $460,000 loan. Initially, the first year payment is $1,479, which of course is absurdly low. But by the time we hit the first 5 year adjustment the payment can jump up to $3,747! The payment more than doubles! These loans were made throughout the bubble from 2004 to 2007, and a large number of these will have major adjustments in 5 years (that is why we are seeing the first batch now). The issue you have is that most borrowers who took out these type of loans have lost all the equity they have in the house, as the balance on your mortgage increases instead of going down. So with rates at historic lows they cannot refinance, and even if they could the payment they are used to at $1500 would be more around $2500 with the lower rates. What will happen is that once payments start to recast and borrowers realize they have no equity in the home ,they will walk away and another rush of foreclosures will occur. Again, this is more for the West Coast and specifically California where property values have decreased as much as 50% in 1 year.
A lot of individuals are under the assumption that low rates the past 12 months have allowed all sub-prime and option ARM clients to refinance and we are now moving forward. That is an incorrect statement. The individuals who are refinancing are clients who are not in trouble with their mortgage but simply clients who have some equity and have paid their mortgage on time. All banks have tightened underwriting guidelines, and unless you have a strong financial situation with a good equity position in your home you cannot refinance and take advantage of the lower rates. No lender is going to take a $400k mortgage on a home that is worth $300k.
My outlook for the New River Valley is a good one in 2010 with home sales increasing slightly as we did not see a rush of Pay Option ARMs like other states.
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Brandon is a branch partner at Alcova Mortgage. He enjoys doing his taxes, firewalking and competitive eating, but not necessarily in that order. You can reach him at brandon@alcovamortgage.com, or 877-552-7150.
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