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The New York Times’ David Streitfeld checks in today on one of the biggest question marks for housing market stability — what happens to the holders of interest-only loans when they hit the point where their payments skyrocket.
These loans were “meant for a market where home prices went only up,” Streitfeld writes.
Edward and Maria Moller are worried about losing their house — not now, but in 2013.
That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay … The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.
“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”
These are the kinds of anecdotes that temper even the most bullish forecasts for a turnaround in the housing market, here in San Diego and nationwide. The story includes some numbers from First American CoreLogic that illustrate how widespread the problem that the Mollers face is:
[T]here are 2.8 million active interest-only home loans worth a combined total of $908 billion.
The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset. …
Homeowners with interest-only loans have a much greater likelihood of default, the First American CoreLogic figures indicate. Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada.
The story includes some insight from Mark Goldman, a local mortgage broker and real estate prof at SDSU. Goldman himself took out an interest-only mortgage on his house a few years ago, and has since seen his payments jump 40 percent, the story said.
Along some of the same lines, the U.S. Treasury this morning released testimony indicating that millions of foreclosures are still expected, despite the Home Affordable Modification Program for loan modifications.
Here’s a snippet of the testimony from Treasury official Michael S. Barr, written for a subcommittee of the House Financial Services Committee:
[W]e recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included. Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February.
Some of these foreclosures will result from borrowers who, as investors, do not qualify for the program. Others will occur because borrowers do not respond to our outreach. Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan.
(a hat tip to Calculated Risk.)