It's no secret that I think the cost of housing has risen too high and will have to come back down.
One of the biggest factors that I look at is the number of people who have purchased property they cannot afford, either as their own home or as an investment property. Borrowing has been so cheap and lending practices have been so lax, it seems like a given that there are a lot of bad loans out there. As the cost of borrowing rises, I expect to see a lot of people who cannot make their payments and who will need to make changes.
I could be wrong and the process has been much slower than I expected. But we are starting to see the signs... One household in eight? *ouch* This is a scary article.
Millions Are Facing Monthly Squeeze On House Payments
Many Adjustable-Rate Loans, Popular in Recent Years, Will Soon Be Reset Higher
The Fadlallas Fight Foreclosure
March 11, 2006
Millions of Americans who stretched themselves financially to buy homes face a painful adjustment -- some could even lose their houses -- as monthly payments on adjustable-rate mortgages are reset higher.
In the hot housing market of recent years, many households took advantage of "affordability" mortgage loans -- heavily promoted by lenders -- that hold down payments for an initial period. Now the initial periods are coming to an end on many of these loans, leaving borrowers to face resets of their interest rates that can cause monthly payments to shoot up between 10% and 50%.
More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody's Economy.com, a research firm in West Chester, Pa.
Most borrowers will be able to cope with the coming wave of resets, in some cases by refinancing with new loans, lenders and mortgage industry analysts say. But some borrowers will have trouble meeting the higher payments and may be forced to sell their homes or could lose their homes to foreclosures. A recent study by First American Real Estate Solutions, a unit of title insurer First American Corp., projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.
The bigger risk is with people who bought homes more recently and haven't yet benefited from lots of price appreciation -- and, in some cases, won't necessarily benefit at all because their local markets are cooling. For a study released in February, Dr. Cagan examined adjustable-rate first mortgage loans made in 2004 and 2005, including refinancings. He figures about 7.7 million of these loans are outstanding, representing $1.888 trillion of debt.
About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to strain their finances.
