Pay Option ARMS in SF Bay Area?

December 24, 2007 4:38 PM

How can I found out how many homes in the San Francisco Bay Area (East Bay in particular) were financed with Pay Option ARM mortgages?

I've seen recent reports that a large number of Pay Option ARM mortgages are due to recast in the next few years, which will likely result in a substantial amount of defaults and further lowering of home prices.

I've also heard that these mortgages were fairly commonly used to finance home purchases in affluent areas, as compared with so-called sub prime mortgages (which tend to be concentrated in low-income areas).

I'm currently in the market for a home in the East side of the SF Bay Area -- Berkeley, Kensington, El Cerrito, and the nicer parts of Oakland, like Rockridge, etc. I'd like to know how the recasting of these mortgages over the next couple years is going to impact this market, which so far has not been as hard hit by the sub prime defaults as other areas.

Can anyone tell me how I can find out how many homes purchased in the East SF Bay Area the past few years were financed with Pay Option ARMs, and when these loans originated?

Thanks,
Mike

posted by mikeand1 to work & money (12 comments total)

I can't answer your direct question, but I think Realty Trac might help with your general quest.
posted by Orb2069 at 5:38 PM on December 24, 2007

Honestly, I don't think you will see the lowering of home costs in desirable Bay Area neighborhoods because the demand is so strong. The demand will keep prices up no matter how many individual mortgages may tank. Why not check out www.naca.com. They are a non-profit housing advocacy group that does its own mortgage lending at fixed rates. Their rates are a little under market rates. They don't require a huge down payment. T They require that you attend their workshop and gear up your credit if it requires it. I know two people who used them in the Bay Area to break in to the housing market. NACA got their money from a predatory lending suit they won against Fleet Bank many years ago. They use that settlement money to fund their mortgages. They are not a traditional lender but my friends have been very happy with them.
posted by 45moore45 at 7:20 PM on December 24, 2007

^^^ Prices have already come down somewhat. Sure, plenty of people want to live here, but it's harder (and a lot more expensive) to get a loan now.

How is it that 1-2 years ago, so many people were able to afford million-dollar houses? Even if you put down 20%, that requires an annual income of at least $200k. There are a lot of rich people around here, but not *that* many.

I'm willing to bet a fair number of houses sold in the last 3 years were financed with Pay Option ARMs, and a certain number of those borrowers are going to default. The question is whether there are enough to further drive down prices by any significant amount.
posted by mikeand1 at 8:53 AM on December 25, 2007

I do like this site, John Burns Real Estate Consulting, for up-to-date RE data. Click around for some useful charts, including some related to the Oakland market specifically.
posted by ikkyu2 at 12:03 PM on December 25, 2007

I don't think you will see the lowering of home costs in desirable Bay Area neighborhoods because the demand is so strong

This is true only to the extent that the buyers in these desirable areas can fully afford the mortgage terms they're taking on. . . . this is a function of the number of sellers needing to sell vs. the income levels of the buyers.

In the financial regimens of times past, the spirit could be willing but the banks enforced quaint notions like ability of the borrowers to actually repay the loan, both principal and interest. For some reason ca. 2003-2006 we saw different rules put in play, where literally anyone could have literally any loan they wanted funded pronto, no questions asked.

Anyhoo, here's the infamous Map O' Misery from Businessweek showing pay option ARMs at 30-40% in the Bay Area.

That was the where, here's the when, courtesy of BofA.
posted by panamax at 8:28 PM on December 25, 2007

(also, I should mention, there are two forces that can counteract gravity WRT bay area prices . . . one, interest rates going down again . . . we seem to starting a similar down-cycle that Greenspan had us on 2002-2004. Two, the $417K conforming limit will probably be raised substantially over the remainder of this decade. Together, these can give buyers another $200K of buying power should interest rates on jumbo loans fall 3%).
posted by panamax at 8:32 PM on December 25, 2007

Panamax,

Thanks, that's helpful, but it still doesn't quite capture the market I'm looking at. San Jose can be considered part of the Bay Area, but it's a good hour's drive from where I'm looking.

Also, re the timing -- doesn't that chart look only at the first reset? My understanding is that if the borrower only makes the minimum payment, the loan can end up getting recast much earlier, once the value of the neg am'd loan gets to 110%, 115%, or some such threshold.

thanks.
posted by mikeand1 at 9:04 AM on December 26, 2007

mike, you are correct about the recast timing. I've been following this story religiously for over a year now and haven't seen any estimates of what's actually going to happen, but the math is surprisingly straightforward here.

Given 115% recast threshholds (which are based on initial LTV not present market value estimates), people underpaying by 3% pa will recast in 5 years, so the recast may or may not alter the expected timing of the ARM reset wave itself.

You may be right about the difference between San Jose and the East Bay, too. Neg-Am was more of an Alt-A thing, so low-income / subprime areas will see a different mix of products.
posted by panamax at 5:35 PM on December 26, 2007

Panamax,

I hadn't thought of the LTV being based on initial value rather than present market value -- that makes a huge difference.

I wonder, though, how many people who are effectively underwater will opt for simply walking away. Because if market values decline substantially, continuing to pay is like tossing money into a black hole for a few years. If it takes 5 or more years for prices to recover, they'd be better off taking the credit hit and starting over.

I'd actually expect San Jose to be roughly similar to Berkeley and Kensington. Both are extremely affluent markets, and comparatively resilient to downward pressures. And I'd guess the mix of buyers is similar too, demographically and economically.

Oakland and El Cerrito, I'm not so sure about.
posted by mikeand1 at 8:52 PM on December 26, 2007

BTW, Panamax, are you in the business?

Also, re interest rates -- whether they continue to move down is a big IF. I note that the 10-yr T-bill has rebounded substantially in the last week or so. Also, the spread between the T-bill and the 30-yr fixed rate is generally increasing (and should continue to increase as credit contracts). Not a whole lot the Fed can do about that.
posted by mikeand1 at 8:56 PM on December 26, 2007

no, not at all. I didn't know jack until 2 years ago, and 80% of what I know now I got from calculatedrisk.blogspot.com

Yeah, the spreads are REALLY what's going to be keeping the banks afloat, but it's in everyone's interest to get jumbo loans moving again at 6% and less. Each quarter point drop will move 10s of thousands of houses in the state.

San Jose's a real mixed bag. Plenty of fast-buck artists, and nobody with AAPL or GOOG money wants to live on that side of the SCV. Only new homes you can get are townhomes, and the old stock is uniformly crap. (I drove around up in the Hills on Arlington recently, and I'd LOVE to buy about 95% of any of those homes, while I have yet to see an equally desirable house in San Jose . . . )

Thanks to the recent tax-code change no longer imposing the 1099 on forgiven debt (on purchase-money mortgages that exceeds the debtor's assets), there will be more people walking away. Plus California is a no-recourse state, too, which makes walking away for purchase-money people painless.

Here's a recent article on the walking away thing.
posted by panamax at 9:35 PM on December 26, 2007

The homes in the Hills are nice housing stock, construction-wise, but they have their own set of problems.

I've looked at quite a few now, and we routinely see severely settling/sliding foundations, plus a lot of homes right in the Hayward fault zone, high fire zones, etc.
posted by mikeand1 at 6:20 PM on December 27, 2007