I left some comments in the local housing blogs this week, asking for people to share their Alt-A stories. Here’s one from Piggington reader sdnerd. His loan just adjusted to a lower payment and he has a lot of thoughts about what these loans might mean for the future of the local market. Here’s his situation, in his own words:
When I purchased I took out a standard five-year interest-only loan at 4.65 percent. After those five years are up, my interest rate resets annually to 2.75 plus the current one-year Treasury rate. In today’s world, that equates to a 3.25 percent mortgage — at least until next year when it resets again. Maybe I’ll be surprised, but realistically that rate has only one direction to go.
I did not take out a negative-amortizing loan, so nothing is getting added on to the back of my balance and there are no other triggers or clauses.
In my circumstances, I can easily afford the mortgage as I bought way below my means, 20 percent down, etc. My debt to household income ratio is somewhere in the 1:1.2 range. I consider that to be an extreme exception however, as most people the last five years bought significantly beyond their means.
My I/O (interest-only) period ended a few months ago, which resulted in my monthly payment going up roughly $200.
My monthly payment is still cheaper then renting, even after the $200 increase.
The rest of my neighbors? Properties are down roughly 50 percent from peak. And naturally it’s not just my neighbors we are talking about here.
In order to re-finance and lock in at today’s absurdly low rates, if you bought at or near the peak you would need to write a six-figure check just to get back to 20 percent equity. This is of course assuming you don’t have any pre-payment penalties, etc.
So there are countless properties out there occupied by people who:
1. Can’t refinance because they are significantly under water.
2. Can’t sell.
3. Can’t afford the payments once these low ‘teaser’ rates vanish.
Prices either need to go back up to peak pricing (not going to happen anytime soon), rates need to stay absurdly low (not going to happen long term), or there needs to be a massive government bailout (as we’ve seen all attempts have been failures; this realistically is not going to happen).
Unless one of those conditions are met, these people have no hope of selling their property — they are stuck until such time as they can no longer afford the monthly payments. For many this is when interest rates hit 5 percent, 6 percent, 7 percent, etc. … Thus, the can keeps getting kicked down the road, buying time — which is especially frustrating for those who are waiting to buy once prices return to relative fundamentals.