7 ms·

I was just thinking about this today. Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a con

by yumraj 4y ago

I was just thinking about this today. Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027?

bogomipz 4y ago
Why would someone have opted for for an adjustable rate mortgage that adjusts after 5-7 years when they could have locked in a historic low rate for 30 years?
- localhost 4y ago
  In my case it’s because I don’t anticipate being in the house longer than the rate lock period
  - bogomipz 4y ago
    Out of curiosity did you get a 5 o 7 year? What was the differential between adjustable and fixed?
- mrep 4y ago
  I just got a 10/1 ARM because second home rates spiked recently [0] so the ARM was a lot lower (I think 1.125%) than a 30 year fixed. [0]: https://www.ezhomesearch.com/blog/second-home-mortgage-rates-are-going-up-in-2022/#:~:text=The%20FHFA%20will%20begin%20to,loan%2Dto%2Dvalue%20ratio https://www.ezhomesearch.com/blog/second-home-mortgage-rates....
UncleOxidant 4y ago
I thought adjustable rate mortgages were pretty much dead after '08? Why would anyone get an ARM when rates were in the 3% range for a 30 year fixed mortgage (as they were for several years until recently)?
- grahamperich 4y ago
  With rates climbing to 5%+ in the last couple months, a 3% ARM (with the hope they could refi to a low interest 30yr fixed before the ARM becomes adjustable) may have been attractive for some..
- Kerrick 4y ago
  Also worth noting: not all ARMs have a balloon payment. For example, I bought most of my farm on a 20yr ARM with a 20yr amortization. As interest rates rise I will have higher payments, but there’s no moment when the music stops and the rest of the principle immediately comes due.
  - brewdad 4y ago
    There is still the risk of an interest rate reset raising the payment amount to an untenable level though. Maybe not in your specific case, depending on your circumstances, but for many others it will be true.
- codefreeordie 4y ago
  Before I gave up on buying a house this year, I was considering an ARM. Why? Because it meant I could qualify for an extra $100k, which gave me a better chance of being able to acquire a house. It didn't matter whether an ARM was better or worse in the long run, it mattered that the ARM could get the house and the fixed rate could not.
- lkjfdslkjf222 4y ago
  Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. Plenty of other reasons. Others have bad credit or otherwise get significantly lower payments on an ARM compared to fixed. I guess there are other reasons, but ARMs are definitely not dead. I don't know the numbers or where to get them though. What are more dead are the "balloon payment" residential mortgages where they may amortize over 30 years but the principal is due in 5 or 10 years.
dragonwriter 4y ago
> Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. Convertible mortgages became popular as an alternative to either fixed or nonconvertible ARMs when rates were high as a way to preserve the option of locking in on a rate drop without going through a refi. Convertibles don't offer a lot when rates are low—if you want to be able to lock in a low rate and rates are already low, you get a fixed. Between that, changes in qualification rules, and memories of the collapse leading into the Great Recession, ARMs of all types have shrunk to a very small share (<5%, IIRC) of residential mortgages, and newer ARMs tend to have rate caps. > Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027? Probably not because of adjustments on existing mortgages. If there is sustained stagflation, then the fact that people can't pay their fixed-rate mortgages given other necessary expenses may produce a similar collapse, though.
vmception 4y ago
2008 was an accounting and leverage problem. Every product in 2008 was completely viable which is why the Federal Reserve bought everything. Only 7% of the borrowers defaulted by then, there wasnt mass irresponsibility on the people with mortgages as suggested, this alone blew up some institutions because they were leveraged nearly 50x and one month of missed mortgage payments would cause a massive drawdown on their portfolio. Without leverage, a portfolio where 93% is going to pay a lot in interest over 5-30 years is a good portfolio. So there is no reason to get uncomfortable or anxious by seeing the words “subprime” “CDOs” or more, as it comes down to whether the accounting is done properly and the leverage is low. Which, I believe is being done. The "big crash" always comes from a different and unexpected (or less expected) angle, where some completely different sector has too much leverage and flimsy accounting.
- tootie 4y ago
  And as much as Dodd-Frank was watered down, the orderly liquidation provisions survived and that means regulators have full authority to stop a situation like Bear Sterns or Lehman collapsing and taking down a sector of the economy with them.
- jjoonathan 4y ago
  Yes, a disappointing fraction of armchair generals are fighting the last war. What are the big speculative candidates for next crash? Contagion from the Chinese real estate market?
  - antisthenes 4y ago
    Generally speaking there aren't fears of a hard crash. The main concern is stagflation due to rising energy prices. It seems like the market is now finally starting to price in the externalities of abating climate change, which results in higher energy prices across the board (which in turn raises prices of everything else, with inflation due to QE piled on top of it). This means that output roughly stays the same, but there are more dollars competing for it.
  - r00fus 4y ago
x86_64Ubuntu 4y ago
I thought 2008 was because 'D' grade mortgages were repackaged into 'AAA' grade securities. When the 'D' grade folks missed payments and defaulted, it brought everything down because their securities had tainted so much of the landscape.
- Finnucane 4y ago
  That was one factor. There was no single cause, but a fragile interconnected web of factors. But yes, subprime loans were carved up and repacked in a way to make them look like AAA bonds. The banks that created these bonds knew that the loans in the bonds were crap; they knowingly lied to investors about it. The ratings agencies stamped all the bonds without any due diligence. Other banks piled on more derivative products on top of those bonds, essentially gambling on whether those bonds would go bad. There was a slime-trail of fraud, laziness, and greed all the way back the original loan itself.
- yardie 4y ago
  2008 was a lot of 'AAA' grade securities not being able to find a greater fool to keep the profit train running. A lot of financial instruments were basically repacking and reselling loans with a bit of interest on top. Once there were no more new buyers it was a cascade of margin calls. Subprime was a very small cause of the GFC but it was the tipping point that brought the house down.
treis 4y ago
ARMs were not the problem in 08. The problem in 08 was interest only loans and/or balloon payments. Borrowers were intending to refinance before those deadlines hit but got stuck once values stopped rising. So they faced payments of 10s of thousands and/or their monthly payment was going to double or triple once they had to start paying principle down. In contrast, if your arm resets from 3% to 7% it's like a 50% increase in mortgage payments. That sucks, but manageable given that your salary likely inflated along with your payment.
- ziddoap 4y ago
  >but manageable given that your salary likely inflated along with your payment. Which, anecdotally, has not been true for myself or any of my colleagues (barring the ol' job switch raise). Wage stagnation is an extremely common problem in many countries and industries. Those that have gotten or negotiated for raises aren't getting raises that account for the record-setting inflation (at least in my country, which is seeing the highest rates of inflation in 30+ years)
- hbosch 4y ago
  >That sucks, but manageable given that your salary likely inflated along with your payment. Can I reside in a world where my salary doubles if my mortgage rate doubles? It sounds very nice.
  - sokoloff 4y ago
    That's not the most analogous comparison; the most analogous comparison would be "where my rate of salary increase follows the changing interest rate on my mortgage". It's not that your $100K salary should go to $200K if your mortgage goes from 3% to 6%, but rather that your $100K salary should go to $106K instead of just $103K if your mortgage goes from 3% to 6%. Similarly, if your mortgage fell from 3% to 2%, you'd be pretty close to even if next year's salary went to $102K and likely in bad shape if it instead went to $67K.
fundad 4y ago
The article's subhead lists everything but mortgage: car loans, personal loans and credit card debt. That's where the growth has been. I remember hearing about 7 year car loans being a risky way to sell more more car loan for the same monthly budget. There was also record high amounts paid back in 2020. I'd like to know if they adjust for that or just more fear-mongering by big banks, admitedly I'm too cheap to read further to find out.
incomingpain 4y ago
>Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. The 'certain percentage' actually went over 50% of new mortgages, excluding refinancing. >Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027? You would think so but no. We should expect it in 2022 primarily harming the large cities.

by yumraj 4y ago

bogomipz 4y ago

Why would someone have opted for for an adjustable rate mortgage that adjusts after 5-7 years when they could have locked in a historic low rate for 30 years?

localhost 4y ago
In my case it’s because I don’t anticipate being in the house longer than the rate lock period
- bogomipz 4y ago
  Out of curiosity did you get a 5 o 7 year? What was the differential between adjustable and fixed?
mrep 4y ago
I just got a 10/1 ARM because second home rates spiked recently [0] so the ARM was a lot lower (I think 1.125%) than a 30 year fixed. [0]: https://www.ezhomesearch.com/blog/second-home-mortgage-rates-are-going-up-in-2022/#:~:text=The%20FHFA%20will%20begin%20to,loan%2Dto%2Dvalue%20ratio https://www.ezhomesearch.com/blog/second-home-mortgage-rates....

UncleOxidant 4y ago

I thought adjustable rate mortgages were pretty much dead after '08? Why would anyone get an ARM when rates were in the 3% range for a 30 year fixed mortgage (as they were for several years until recently)?

grahamperich 4y ago
With rates climbing to 5%+ in the last couple months, a 3% ARM (with the hope they could refi to a low interest 30yr fixed before the ARM becomes adjustable) may have been attractive for some..
Kerrick 4y ago
Also worth noting: not all ARMs have a balloon payment. For example, I bought most of my farm on a 20yr ARM with a 20yr amortization. As interest rates rise I will have higher payments, but there’s no moment when the music stops and the rest of the principle immediately comes due.
- brewdad 4y ago
  There is still the risk of an interest rate reset raising the payment amount to an untenable level though. Maybe not in your specific case, depending on your circumstances, but for many others it will be true.
codefreeordie 4y ago
Before I gave up on buying a house this year, I was considering an ARM. Why? Because it meant I could qualify for an extra $100k, which gave me a better chance of being able to acquire a house. It didn't matter whether an ARM was better or worse in the long run, it mattered that the ARM could get the house and the fixed rate could not.
lkjfdslkjf222 4y ago
Don't know numbers off hand but we had a <4% rate ARM because it was the lowest rate and we liked the flexibility of paying it off asap (or if something happened, paying it off over 30 years) versus a 15-year fixed. Plenty of other reasons. Others have bad credit or otherwise get significantly lower payments on an ARM compared to fixed. I guess there are other reasons, but ARMs are definitely not dead. I don't know the numbers or where to get them though. What are more dead are the "balloon payment" residential mortgages where they may amortize over 30 years but the principal is due in 5 or 10 years.

dragonwriter 4y ago

> Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. Convertible mortgages became popular as an alternative to either fixed or nonconvertible ARMs when rates were high as a way to preserve the option of locking in on a rate drop without going through a refi. Convertibles don't offer a lot when rates are low—if you want to be able to lock in a low rate and rates are already low, you get a fixed. Between that, changes in qualification rules, and memories of the collapse leading into the Great Recession, ARMs of all types have shrunk to a very small share (<5%, IIRC) of residential mortgages, and newer ARMs tend to have rate caps. > Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027? Probably not because of adjustments on existing mortgages. If there is sustained stagflation, then the fact that people can't pay their fixed-rate mortgages given other necessary expenses may produce a similar collapse, though.

vmception 4y ago

2008 was an accounting and leverage problem. Every product in 2008 was completely viable which is why the Federal Reserve bought everything. Only 7% of the borrowers defaulted by then, there wasnt mass irresponsibility on the people with mortgages as suggested, this alone blew up some institutions because they were leveraged nearly 50x and one month of missed mortgage payments would cause a massive drawdown on their portfolio. Without leverage, a portfolio where 93% is going to pay a lot in interest over 5-30 years is a good portfolio. So there is no reason to get uncomfortable or anxious by seeing the words “subprime” “CDOs” or more, as it comes down to whether the accounting is done properly and the leverage is low. Which, I believe is being done. The "big crash" always comes from a different and unexpected (or less expected) angle, where some completely different sector has too much leverage and flimsy accounting.

tootie 4y ago
And as much as Dodd-Frank was watered down, the orderly liquidation provisions survived and that means regulators have full authority to stop a situation like Bear Sterns or Lehman collapsing and taking down a sector of the economy with them.
jjoonathan 4y ago
Yes, a disappointing fraction of armchair generals are fighting the last war. What are the big speculative candidates for next crash? Contagion from the Chinese real estate market?
- antisthenes 4y ago
  Generally speaking there aren't fears of a hard crash. The main concern is stagflation due to rising energy prices. It seems like the market is now finally starting to price in the externalities of abating climate change, which results in higher energy prices across the board (which in turn raises prices of everything else, with inflation due to QE piled on top of it). This means that output roughly stays the same, but there are more dollars competing for it.
- r00fus 4y ago

x86_64Ubuntu 4y ago

I thought 2008 was because 'D' grade mortgages were repackaged into 'AAA' grade securities. When the 'D' grade folks missed payments and defaulted, it brought everything down because their securities had tainted so much of the landscape.

Finnucane 4y ago
That was one factor. There was no single cause, but a fragile interconnected web of factors. But yes, subprime loans were carved up and repacked in a way to make them look like AAA bonds. The banks that created these bonds knew that the loans in the bonds were crap; they knowingly lied to investors about it. The ratings agencies stamped all the bonds without any due diligence. Other banks piled on more derivative products on top of those bonds, essentially gambling on whether those bonds would go bad. There was a slime-trail of fraud, laziness, and greed all the way back the original loan itself.
yardie 4y ago
2008 was a lot of 'AAA' grade securities not being able to find a greater fool to keep the profit train running. A lot of financial instruments were basically repacking and reselling loans with a bit of interest on top. Once there were no more new buyers it was a cascade of margin calls. Subprime was a very small cause of the GFC but it was the tipping point that brought the house down.

treis 4y ago

ARMs were not the problem in 08. The problem in 08 was interest only loans and/or balloon payments. Borrowers were intending to refinance before those deadlines hit but got stuck once values stopped rising. So they faced payments of 10s of thousands and/or their monthly payment was going to double or triple once they had to start paying principle down. In contrast, if your arm resets from 3% to 7% it's like a 50% increase in mortgage payments. That sucks, but manageable given that your salary likely inflated along with your payment.

ziddoap 4y ago
>but manageable given that your salary likely inflated along with your payment. Which, anecdotally, has not been true for myself or any of my colleagues (barring the ol' job switch raise). Wage stagnation is an extremely common problem in many countries and industries. Those that have gotten or negotiated for raises aren't getting raises that account for the record-setting inflation (at least in my country, which is seeing the highest rates of inflation in 30+ years)
hbosch 4y ago
>That sucks, but manageable given that your salary likely inflated along with your payment. Can I reside in a world where my salary doubles if my mortgage rate doubles? It sounds very nice.
- sokoloff 4y ago
  That's not the most analogous comparison; the most analogous comparison would be "where my rate of salary increase follows the changing interest rate on my mortgage". It's not that your $100K salary should go to $200K if your mortgage goes from 3% to 6%, but rather that your $100K salary should go to $106K instead of just $103K if your mortgage goes from 3% to 6%. Similarly, if your mortgage fell from 3% to 2%, you'd be pretty close to even if next year's salary went to $102K and likely in bad shape if it instead went to $67K.

fundad 4y ago

The article's subhead lists everything but mortgage: car loans, personal loans and credit card debt. That's where the growth has been. I remember hearing about 7 year car loans being a risky way to sell more more car loan for the same monthly budget. There was also record high amounts paid back in 2020. I'd like to know if they adjust for that or just more fear-mongering by big banks, admitedly I'm too cheap to read further to find out.

incomingpain 4y ago

>Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. The 'certain percentage' actually went over 50% of new mortgages, excluding refinancing. >Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027? You would think so but no. We should expect it in 2022 primarily harming the large cities.