Option ARM Mortgages

This is the next shoe to drop and it seems to be beginning to drop now. The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal. When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level. Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they threaten a much greater hit to the consumer than the subprimes. Many of these are in the higher end market above $400,000. These people were expecting to refinance when the value of their home went up. Sadly, it has gone down instead. Many of them will be mailing in their keys. The banks refer to this as jingle mail.

Cure Rate

You're going to start hearing this term a lot more. It refers to the number of home owners that are delinquent on their mortgages that find a way to cure the problem and continue to make their payments. That rate has been about 45% from 2000 to 2006 for prime mortgages. This has caused banks to not be very negotiable on short sales. Short sales are where the bank agrees to let the owner sell the home for less than they owe the bank for it. The bank usually forgives the difference. Banks have been reluctant to agree to short sales because they figure that most home owners will find a way to make that payment before they have to go into foreclosure. Moreover, the banks have insurance on the loan through private mortgage insurance that they only collect if they foreclose. They don't get the insurance if they allow a short sale. Recently however, the cure rate has dropped dramatically to about 6.6%. Less and less home owners are managing to find a way to stay afloat. Hopefully, this will encourage the banks to speed up the process on short sales. I have one that I've been helping a buyer purchase that we started on in mid-April.

Condo Market

Not good here in Charleston. Earlier this year, the division between single family detached and single family attached(condo's and townhomes) was about 75%/25%. Now it is 67%/33%. Our inventory overall is almost exactly the same, but the percentage that are condos and townhomes has gone up. Supply and demand still works and this is bad news for the condo market. Overall inventory is too high and inventory of both segments of the market is too high. So, prices will have to come down more. But, the inventory of condos and townhomes is getting worse, which means that their price will suffer even more than those of single family homes as we move forward.