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June 16, 2005

Home Loans

I really am not a gloom and doomer - but sometimes things just don't seem to make much sense. We get this from the NY Times today:

This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.

The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth. For individual families, the problems could be significant.

"I'm not sure that people are being counseled on really how big of a risk they are taking," said Amy Crews Cutts, deputy chief economist at Freddie Mac, the mortgage company.

Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years.

The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle.

With the help of new computer models, lenders have brought out newer and riskier mortgages to attract borrowers and increase their buying power during the long housing boom. The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past.

The hot loan of 2004 - the interest-only mortgage - allowed home buyers to pay no principal for the first few years of the loan, substantially lowering their initial payments.

It has remained popular this year, accounting for at least 40 percent of purchase loans over $360,000 in areas with fast-rising home prices, like San Diego, Washington, Seattle, Reno, Atlanta and much of Northern California, according to LoanPerformance, a mortgage data firm.

This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent.

During the first quarter of 2005, 40 percent of mortgages over $360,000 issued to people with good credit were option ARM's, said David Liu, a mortgage strategy analyst with UBS in New York. Very few borrowers used option ARM's before 2003.

I don't know about you, but that doesn't sound good to me.