With rising interest rates cause a big increase in defaults?

bigcity11 · Joined: 16 Jun 2006 Posts: 2

I live in San Francisco. With so many variable rate and interest only mortgages, is there a chance people who over extended themselves are going to get burned? Could that be the last straw that bursts this the bubble?

chow · Posted: Fri Jun 16, 2006 3:33 pm Post subject:

You are on the coast, you're a little safer there. the slow down is already happening there-but....do the math. FLAT increases is what your MI companies are worried about. They've been watching for it for over a year now.

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Of course there's always that potential.

That being said, there are more loan programs today than there were 3 years ago, or 5 years ago, or 10 years ago. Some of those loan programs are less strict, or offer various incentives. If people do some homework and call their lender, chances are they'll be ok.

Unless they bought a $700,000 home on a $100,000 home's salary. But that would have gotten them either way.

bigcity11 · Joined: 16 Jun 2006 Posts: 2

Thanks for the banter all.

I'm slightly ashamed to admit that I secretly wouldn't mind seeing people who stuck their necks out feel some pain. Truth is, with a combined HH income of around $180K (and zero debt), I suspect my fiancee and I are in a better financial position than most Bay Area residents. Nevertheless, we've elected to be conservative and wait (and not give in to the hype that is the Bay Area housing market).

Of course, in a free market, people have the choice to absorb whatever risk they want. On the same token though, there will always be winners and losers in this game. I'll be interested to see how things shake down in the next year (or 2). Historically, there's no question that housing is a solid investment over time. But given the huge increase in prices over the past 3 years, combined with the current pressures of interest rates, I wonder if it's not unrealistic to think that prices could begin to slide (not crash) in the short term at least during the next 3 years or so. And if so, what would be the fallout.

All speculation I suppose, but then again, isn't that the nature of investing? :wink:

dsouthr · Joined: 24 Jun 2006 Posts: 15 Location: Columbia SC

Personally, I don't think you will see it as dramatic as it has been hinted. The fed simply can not allow the major housing market in this country to bust, its impact would be felt in huge ways coast to coast. There has to be pull back to some degree but the fed will have no choice but to contain it in some way.

The problem is all those interest only and ARMs leveraged at very high LTVs and the fact that basically all major lenders are deep to the neck in these things. If you bet on crazy appreciation to make up for the fact that you are not paying down your principle then you are not going to be happy and it will force an increase in the FC rate. There is no escape from that.

We in SC have had a major housing problem for the last few years, because we are so heavy with MFG homes. People 5-7yrs ago were put on purchase deals tied to 2 & 3yr ARMS. But because values were artificially moved up to allow people n with low down payments and the seller still make their profit; when the refi out of the ARM appraisal was done (due to the fed crack down on improper values) people found their home worth less than when they bought it. It was not actually worth less but the initial value was more than it should have been. No matter the reason, the result was the same. People would go into a sub-prime deal at 55% DTI on a 2yr ARM. They were 120% LTV upside down via the new refi appraisal and no lender wosuld buy that. The customer had no choice but pay the increased rate payment or walk away. To many walked away because they simply did not have enough money to make the higher payment. So we got bombed with MFG foreclosures and that drove lender after lender to stop doing MFG home deals. Now we are stuck with a ton of them out there and very limited refi opportunity. Now the house on a acre of land that was bought for $100K, I can by as FC property for 30K cash but some poor family has a FC on their credit record that will take a few years to allow them back in the housing market.

That was allowed to happen in SC but because manufactored homes is not a big deal nation wide, it was allowed to fester, had MFG homes been a huge part of the California market, something would have been done to contain it. Basically lenders killed a entire property type because they screwed up in doing their due diligence up front. It was not right it is not right now, but go find me a sub-prime lender today that will do a mortgage on manufactored homes reasonabally! There is only 1 and they are tuff to close thru but they are the only game in town and can set their own guidelines.