Like most people, I thought we were reaching the bottom of the subprime loan fall-out and that eventually the glut of foreclosures would become new homes for buyers and prices would level out. However, if you watched the CBS 60 Minutes article in December titled "A Second Mortgage Disaster on The Horizon?", you know that the housing market will continue correcting itself for some years to come. Understanding what will be happening in this market will make you better prepared for it.
Real estate professionals are generally familiar with the terms Alt-A and option ARM mortgages. These were considered to be the higher quality exotic mortgages. They gained popularity in the mid 2000s as housing prices soared. Alt-A mortgages, short for Alternative A-paper loans, were developed in the mid-1980's. They typically required little or no proof of a borrower's income and were common with self-employed borrowers and those purchasing investment properties, who were unable to obtain "prime" loans. Option ARM loans initially offered the borrower monthly payment options (a specified minimum payment, interest only payment, a 15-year payment, and a 30-year payment) and were also known as "pick-a-payment" loans. Option ARM loans start off with a low interest rate - called a "teaser rate" - but after two, three or five years the rate resets or adjusts up. As the rate adjusts up, so does the payment; a loan that started off at $1200 could easily jump to $2200 or more.
According to Inside Mortgage Finance, there are about three million Americans with Alt-A mortgage loans. These loans total one trillion dollars, compared to 855 billion in subprime loans. Another expert, Whitney Tilson, said to 60 Minutes in December that sub-prime loans were approaching one trillion dollars, the Alt-A loans at about one trillion dollars, and option ARM loans at about 500 to 600 million dollars. His data showed the Alt-A and option ARM loans resets peaking in 2011.
Because Alt-A and option ARM loans were bundled into Wall Street securities and sold to investors. Sean Egan, who runs a credit rating firm that analyzes corporate debt (and is credited as one of six Wall Street pros who predicted the fall of the financial giants), believes that "we're not going to get the housing industry back on track until we clear out this garbage that's in there." He continues with "the same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that's taking a little longer to show." He believes that we are only about halfway through the mortgage bubble.
The good news is that knowledge is power. Just knowing what could be ahead means that we have the opportunity to stop the crisis that might be looming. An article at the realtor.org website discusses a house bill aimed at righting the housing market; the first big step in what they believe will be economic recovery. Introduced by Rep. Barney Frank (D-Mass.), H.R. 384, The TARP (Troubled Asset Relief Program) Reform and Accountability Act, would require the Treasury Department to develop a program to stimulate demand for home purchases and lower property inventories, outside of TARP. They would do this by creating affordable mortgages available to qualified buyers through interest rate buydowns, which is a priority of the National Association of Realtors. The measure would further amend TARP provisions of the Emergency Economic Stabilization Act of 2008, making steps to reduce foreclosures, strengthen accountability, and close loopholes in the Act.
For those in the business of selling homes, the National Association of Realtors says that the supply of houses available has grown from 2.2 million units three years ago to 4.6 million units in mid-2008. Along with the population of the U.S. growing by three million people a year, more people means more housing needs. That, coupled with falling interest rates (as low as 4% for mortgage loans), and a slight loosening in the credit market means there is hope in sight!