Was it really ARM's that caused the "credit crisis"? In the last year there has been a lot of blame on Adjustable Rate Mortgages causing the blame for the mortgage meltdown and ultimately the "credit crisis".
This is because the view you get is the Media take on what the problem is.
Yes, while the "sub prime mortgages" were usually written as an ARM, it was not the ARM that caused the problem.
It was the fact that it was sub prime.
In fact most of those loans were below sub prime (very low credit scores and an individual history of slow and no paying debt).
Couple that with prime borrowers taking on sub prime loans, 80/20 financing, and huge areas of the country that severely overbuilt for their population and employment base and the bubble had to burst.
The fact that there was ARM's had nothing to do with the credit crisis.
FHA ARM's, and Conforming loan ARM's have not failed beyond normal statistics.
It was putting people (most of whom shouldn't have been buying a home in the first place) in sub prime ARM's that they couldn't qualify for if it had been one point higher.
Combine that with market saturation where the houses stopped selling because they had no one else to sell them to and then the cards start to fall.
In those overbuilt markets the prices started to decline because the builders had to get them sold.
This affected the prices on the previously sold homes in the same neighborhood.
As those values declined, refinancing the ARM's became more difficult and eventually impossible.
The defaults started increasing; the investors who bought the loans were seeing a decrease in returns and stopped buying those mortgage backed securities (Lehman Bros et al).
This all started in late 2005 and into 2006.
By august of 2006 the investors were rapidly pulling out of the mortgage investments and by May of 2007 most of the sub prime lenders had disappeared or severely curtailed operations.
Hence a degradation of the market and a lot of the loan programs that people had taken advantage of.
With the elimination of the loan programs that they used to buy the home, once the rate adjusted they were unable to obtain new financing to fix their rate.
The new payments were beyond most of their means and with no new loan and a value that was declining, they walked away from their mortgage and home.
Even people with great 30 year fixed rates were giving their home back to the bank because they couldn't sell it for even what they owed.
There are several things that were ignored.
One is in order to maintain a stable housing market, there needs to be a market.
That market is predicated on employment and a growing local economy.
If that exists then building new homes to accommodate the increase in population is fine.
If the population and employment aren't growing, then building more homes is foolish.
Just look at most of California, Nevada, Arizona, Florida and the other state that have the most severe housing problem.
In some of those areas values have decrease by over 50%.
Other areas or states were almost unaffected.
Take my home state of Washington of example.
First of all there is a GMA (Growth Management Act) that inhibits the overbuilding of new homes.
The counties can only issue new building permits based on projected population and job growth.
Home values through out most of the state only declined by a small margin and will quickly recapture the lost value because there is a pent up demand for homes.
Specifically in Snohomish County, there is a shortage of rentals (under 2%) which is basically full.
The local employment opportunities continue to increase (we are home to Boeing Everett plant where they build the 747,767 and the new 787 Dreamliner, as well as close to Microsoft headquarters, a Bio Tech corridor.
In fact the North King county and Snohomish county area is home to Nintendo, EBay, Amazon.
com Starbucks and other diversified industries and all of the other business that either support them or benefit by them).
Seattle proper is out of land and if there are to be new homes built, they need to go to where the land is available.
What hit our area the hardest was not the overbuilding of homes but the lack of mortgage money, or the perception of it, and the over hype from the media that virtually scared the market down.
If the local media had been more judicious in their reporting and looking at the local aspect and reported correctly, then I'm sure we would have been less hard hit.
So it wasn't ARM's that caused the problem.
It was Wall Street greed along with a portion of the industry that was completely unregulated, builders, realtors and loan officers all taking advantage of free and easy money.
Buyers (borrowers) taking out mortgages that stretched their budgets at the initial start rate that they couldn't afford if the rate increased even one point and with no reserves (savings) to fall back on.
And the lenders not having sufficient reserves to cover the defaults that they knew were coming.
There are even more Wall Street reasons (like short selling financial stocks and Hedge funds) that complicate matters even worse.
There has been a lesson learned here and it will take some time for the markets to find a balance.
In the meantime the housing markets will all level out based on their own local economies and employment base.
The stronger local economies will rebound the fastest and states like Florida will take the longest.
The media will continue to hype the worst of the worst and we will have a hard time understanding that it has nothing to do with us.
Mortgage money is still readily available to credit worthy borrowers and will continue to be, along with attractive interest rates, just like it was 10 years ago before the entire silly loan programs screwed the market up.
Don Davis
This is because the view you get is the Media take on what the problem is.
Yes, while the "sub prime mortgages" were usually written as an ARM, it was not the ARM that caused the problem.
It was the fact that it was sub prime.
In fact most of those loans were below sub prime (very low credit scores and an individual history of slow and no paying debt).
Couple that with prime borrowers taking on sub prime loans, 80/20 financing, and huge areas of the country that severely overbuilt for their population and employment base and the bubble had to burst.
The fact that there was ARM's had nothing to do with the credit crisis.
FHA ARM's, and Conforming loan ARM's have not failed beyond normal statistics.
It was putting people (most of whom shouldn't have been buying a home in the first place) in sub prime ARM's that they couldn't qualify for if it had been one point higher.
Combine that with market saturation where the houses stopped selling because they had no one else to sell them to and then the cards start to fall.
In those overbuilt markets the prices started to decline because the builders had to get them sold.
This affected the prices on the previously sold homes in the same neighborhood.
As those values declined, refinancing the ARM's became more difficult and eventually impossible.
The defaults started increasing; the investors who bought the loans were seeing a decrease in returns and stopped buying those mortgage backed securities (Lehman Bros et al).
This all started in late 2005 and into 2006.
By august of 2006 the investors were rapidly pulling out of the mortgage investments and by May of 2007 most of the sub prime lenders had disappeared or severely curtailed operations.
Hence a degradation of the market and a lot of the loan programs that people had taken advantage of.
With the elimination of the loan programs that they used to buy the home, once the rate adjusted they were unable to obtain new financing to fix their rate.
The new payments were beyond most of their means and with no new loan and a value that was declining, they walked away from their mortgage and home.
Even people with great 30 year fixed rates were giving their home back to the bank because they couldn't sell it for even what they owed.
There are several things that were ignored.
One is in order to maintain a stable housing market, there needs to be a market.
That market is predicated on employment and a growing local economy.
If that exists then building new homes to accommodate the increase in population is fine.
If the population and employment aren't growing, then building more homes is foolish.
Just look at most of California, Nevada, Arizona, Florida and the other state that have the most severe housing problem.
In some of those areas values have decrease by over 50%.
Other areas or states were almost unaffected.
Take my home state of Washington of example.
First of all there is a GMA (Growth Management Act) that inhibits the overbuilding of new homes.
The counties can only issue new building permits based on projected population and job growth.
Home values through out most of the state only declined by a small margin and will quickly recapture the lost value because there is a pent up demand for homes.
Specifically in Snohomish County, there is a shortage of rentals (under 2%) which is basically full.
The local employment opportunities continue to increase (we are home to Boeing Everett plant where they build the 747,767 and the new 787 Dreamliner, as well as close to Microsoft headquarters, a Bio Tech corridor.
In fact the North King county and Snohomish county area is home to Nintendo, EBay, Amazon.
com Starbucks and other diversified industries and all of the other business that either support them or benefit by them).
Seattle proper is out of land and if there are to be new homes built, they need to go to where the land is available.
What hit our area the hardest was not the overbuilding of homes but the lack of mortgage money, or the perception of it, and the over hype from the media that virtually scared the market down.
If the local media had been more judicious in their reporting and looking at the local aspect and reported correctly, then I'm sure we would have been less hard hit.
So it wasn't ARM's that caused the problem.
It was Wall Street greed along with a portion of the industry that was completely unregulated, builders, realtors and loan officers all taking advantage of free and easy money.
Buyers (borrowers) taking out mortgages that stretched their budgets at the initial start rate that they couldn't afford if the rate increased even one point and with no reserves (savings) to fall back on.
And the lenders not having sufficient reserves to cover the defaults that they knew were coming.
There are even more Wall Street reasons (like short selling financial stocks and Hedge funds) that complicate matters even worse.
There has been a lesson learned here and it will take some time for the markets to find a balance.
In the meantime the housing markets will all level out based on their own local economies and employment base.
The stronger local economies will rebound the fastest and states like Florida will take the longest.
The media will continue to hype the worst of the worst and we will have a hard time understanding that it has nothing to do with us.
Mortgage money is still readily available to credit worthy borrowers and will continue to be, along with attractive interest rates, just like it was 10 years ago before the entire silly loan programs screwed the market up.
Don Davis
Source...