ARMed Homeowner Update

You may remember this story, where I looked at the popularity of so-called “exotic” loans. That designation typically refers to adjustable-rate mortgages where borrowers choose to pay either just the interest, or a portion of the interest, accruing each month.

For that story, I spoke with Julie Haas. Haas is a scientist at UCSD who was paying only the interest for the first two years of her loan, hoping to sell or refinance at the reset period, when her payments would jump up to include some of the principal on her house.

From the story:

But she couldn’t plan for the market’s fluctuations. Soon after buying, she watched some of her neighbors’ comparable units skyrocket, selling for a profit of $50,000. But recently she’s watched them depreciate right back to her starting price.

“I’m back to ground zero,” she said. “Ironically, I’m back to my worst-case scenario.”

Haas’ current research funding will end in January. Her mortgage is due to reset — to start including payments on the principal of the loan — in April. Her monthly payments will double. And Haas fears her condo will have depreciated even more by then.

“I’m very scared that I’m just going to be stuck here,” she said.

So, last week, I checked in with Haas to see how she’s doing. She said she’s found another research position at Harvard and will move this summer. She had this update on the condo’s value:

As for the condo, from what I can tell prices are still very flat in my neighborhood.  A unit identical to mine recently sold for $40k over what I paid in 2004, but there’s another twin unit on the market now starting at $30k over what I paid.  The biggest change by far, though, is that the same MLS search I used in 2004 now yields 70-90 units on the market, compared 10-20 units in 2004.   There are several large conversion projects still selling here – so many listings with similar addresses & pictures.  So between carrying costs in an oversupplied market, and a flat price – it doesn’t make sense to sell, and I will be renting the unit out soon.  I’ll hope to move back in a few years, or sell it if/when the market is more favorable.

She refinanced her condo to avoid the adjustable-rate reset through ING Direct, which she called an excellent experience. “I knew higher payments were coming whether I refi’d or not,” she said.

But Haas said she’s glad for a few benefits in her situation:

I knew the job-end was coming, so I made sure to refi before my income evaporated.  Also, since my parents had helped with the down payment, I am/was not upside-down, so no worries for appraisal or the ability to get a loan.  I can see where a surprise job loss, and a higher LTV [loan-to-value ratio], could really spell trouble, fast, for other people.

Despite the silver linings she’s found, Haas said she’s “REALLY not thrilled” about becoming a long-distance landlord, or potentially a long-distance seller, and the market is the thing forcing those two options.

While I’m still lucky to have what I do, and things will work out (I think), the market has still put me someplace I don’t want to be, and will have negative effects of me for a bunch of time to come.

— KELLY BENNETT