Sub Prime Disaster?

S

stbruce

This may sound naive, but 30 year fixed mortgages are only about 20-30 bp higher the a lot of ARMS.... couldn't the 1 trillion in ARMS just refinance to a fixed without much change in the monthly? Wouldn't this prevent most of the defaults?
 
true, but you have to remember. A lot of folks that did ARMS did so at levels that were substantially lower than now. At the time, they probably couldn't even afford a 30yr mortgage.

So, to reset at or near these rates, or even convert to a 30yr fixed, will put a lot of people under the water budget-wise. They didn't take into account what is happening now. Now, they will see.
 
Quote from stbruce:

Good point, I could see a 200bp increase and penalties put an overextended household over the edge.
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And so can everyone esle, that's why I don't think it's that big of an issue going forward. If everyone can see it coming, will it really be a threat?
 
I suppose two things could happen.....
1) The average family making $60,000, didn't take on any more debt, and they each got 1.5% salary increases yearly starting five years ago when they got the ARM, thats roughly an additional $500 net they have each month to offset the increase in a refianced fixed, and they are fine.......

or

2) They are typical JA Americans who loaded up on more debt, with the salary increases, and now they are screwed.
 
Knowing the people that I know who are in this predicament, item 2 definitely applies.

Quote from stbruce:

I suppose two things could happen.....
1) The average family making $60,000, didn't take on any more debt, and they each got 1.5% salary increases yearly starting five years ago when they got the ARM, thats roughly an additional $500 net they have each month to offset the increase in a refianced fixed, and they are fine.......

or

2) They are typical JA Americans who loaded up on more debt, with the salary increases, and now they are screwed.
More...
 
Quote from stbruce:

I suppose two things could happen.....
1) The average family making $60,000, didn't take on any more debt, and they each got 1.5% salary increases yearly starting five years ago when they got the ARM, thats roughly an additional $500 net they have each month to offset the increase in a refianced fixed, and they are fine.......

or

2) They are typical JA Americans who loaded up on more debt, with the salary increases, and now they are screwed.
More...

The 1.5% salary increase didnt even cover the increased cost of their healthcare policy, let alone anything else. Sadly, most of America is hiding behind door #2.
 
Quote from stbruce:

This may sound naive, but 30 year fixed mortgages are only about 20-30 bp higher the a lot of ARMS.... couldn't the 1 trillion in ARMS just refinance to a fixed without much change in the monthly? Wouldn't this prevent most of the defaults?
More...

Yes, but many of them are waiting, because the longer they wait, the more they will save toward the refinancing cost. Its rational behavior, but most just look at the number of ARMS on the bank's balance sheet and think it will lead to some kind of disaster.

If I did have an ARM right now, and it cost less per month that a fixed note, I definitely would wait until the last moment to refinance unless I felt interest rates were going to jump.

SM
 
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