Sunday, July 25, 2004

I don't want to say "I told you so," but . . .
A red hot housing market and higher interest rates are pushing increasing numbers of US homebuyers into the most risky kinds of mortgages, spelling trouble for financially stretched consumers in years to come.

The Consumer Federation of America will on Monday release a report warning of a potential financial "time-bomb" due to an increasing interest among low-income consumers in adjustable-rate mortgages at a time of rising interest rates. . . .

Around two-thirds of all mortgage debt held by "sub-prime" borrowers - borrowers with poor credit histories - is in some kind of variable-rate product, up from around one-third in the mid-1990s, according to Fitch Ratings.

To be sure, many adjustable mortgage allow consumers to "fix" rates for a certain period of time - up to 10 years - making them useful options for short-term homeowners.

But the mortgages taken out by sub-prime borrowers typically adjust after just two or three years, making them particularly vulnerable to higher interest rates, according to Sarbashis Ghosh, a senior director at Fitch.

The increasing number of adjustable mortgages owned by sub-prime borrowers is potentially dangerous for investors. Homeowners with adjustable mortgages are more likely to default than homeowners with fixed mortgages and more than half of all mortgage loans issued in the US are packaged into securities and sold to institutional investors.

"Less-than-prime mortgage borrowers are thus effectively borrowing from investors willing to shoulder the higher risks involved," said Mark Zandi, chief economist at Economy.com.
For a post from earlier this month on the bubblicious California housing market, check out these stats and soak in all the sub-prime borrowers.
Californians are getting giddy over adjustable-rate mortgages (ARMs). In the Los Angeles Area, the percent of new mortgages with adjustable rather than fixed rates rose from 21% in 2003:I to 45% in 2004:I. In Sacramento there was a similar movement, from 20% to 47% over the same period. In the Bay Area the popularity of ARMs went from 36% to 56%, and in San Diego from 31% to a whopping 59%. Of the 32 largest housing markets in the US, only Chicago and Denver even come close to depending on ARMs as much as do the four markets in California, but price appreciation in these cities has been far less than in the Golden State.

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