Friday, August 31, 2007

Reset ARMs to jump 2 percentage points or more

Come this fall, homeowners with adjustable rate mortgages could be payingdouble-digit interest rates. Here’s that that would mean for an average homeowner:

[O]n a $210,000 loan balance (the average subprime amount in 2006), the additional 2.5 percentage point increase on the interest rate adds about $4,560 a year, or about $380 a month, estimates James Kragenbring, senior investment officer at Advantus Capital Management in St. Paul, Minn.

You think we’ve been seeing a “surge” in defaults already? You ain’t seen nothing yet.
“Given the debt-to-income ratio of the typical subprime borrower at the time they received their loan, it is unclear where the extra cash flow will come from,” says Mr. Kragenbring.

Given the fact that BushCo’s economic non-surge has kept household income flat the last few years, the extra money ain’t coming from any pay increase. So, you get these problems:
As the interest rates have climbed, the percentage of delinquencies is on the rise. Of the loans made in 2001, nearly 30 percent are now at least 60 days past due. Loans made last year now have nearly a 15 percent delinquency rate, a faster growth rate than any other year. Mr. Kragenbring says the most recent loans in 2007 are not performing much better.

Given that the typical subprime loan means you are paying less than the full interest accruing on your mortgage, the first reform needed is a truth-in-lending law similar to what is needed in the credit card industry. Homebuyers need to be shown, at the interest rate of their mortgage, what is the minimum monthly payment they need to make to at least hold interest accrual at zero.