Reader shares an FB story, and in IMPORTANT question!!
This particular story comes from a reader. Apparently they know a couple in Orange County who just signed to purchase a 2 bed/1 bath condo in Santa Ana for about $425K using a 2/28 I/O ARM to 100% financing (80/20). The reader assumes they had to use stated income, but didn't ask. Things get tricky as the borrowers asked the reader if they could determine if the property taxes were included in their monthly pament. They were told by the loan officer that the taxes were included in the payment. After looking through the paperwork, the reader found the loan summary where it says County/City taxes, there was N/A filling in the blank. The reader couldn't believe the situation their friends were getting into. They were buying a place with 100% financing and an interest only payment, and their taxes were not included in the payment as they had originally thought. Their friends, like many others, are/were under the impression that they can just refinance if they get in trouble down the road. The reader told them they MIGHT be able to refinance later, but there are no guarantees. The reader then asked me if there is any recourse once they sign the dotted lines? Is there a grace period in which they can get out of the loans?
It sounds like these borrowers just got in over their heads. The sad thing is that they aren't out there to flip properties, they are just looking for a place to live. It sounds like they bought so they wouldn't be 'left behind'. Unfortunately, once they sign, they don't have much recourse on a purchase transaction. On refinances, there is a 3-day recision period where the borrower can 'get out of it'. In this case, once the docs are signed, there is very little recourse they have to get out of the transaction. It is situations like these that I want people to avoid. Hopefully things will work out for these borrowers and they will be able to afford to keep their home once they move into it AND when the loan adjusts in 2 years. I just hope they find a way to pay the $400 a month taxes that they thought was included in their 'payment'.
That said, can somebody PLEASE give me some data that suggests how property can continue to go up?!?!? I'll post some quick data why I don't think it can continue to go up:
- Yesterday I posted the stats from San Diego county. From Dec 04 to Dec 05, property went up a whopping 4.8%. BUT, the decrease in value from November to December 05 was the single largest decrease in the 18 years that they have been keeping records. If you look at the stats from 1989 and 1990 right before the last bust, here were the appreciation rates: 16.6% in 1989 to 3.3% in 1990. This time around we had 21.1% in 2004, and 7.6% in 2005. Looks pretty similar to me...
- Today, we have 2 articles that came out in the OC Register: one article states that there is an entire zip code where every purchase loan was an ARM and in Santa Ana where 86-88% of the loans were ARMs (that is where our borrower above was buying). In another article, the tax collector stated that 46,000 residences have yet to pay their taxes due on January 7th. This is a 15% jump from last year, and the highest number since 1995.
- We have inventories in San Diego that are up 10% since January 1st, and 5 times what they were a mere 18 months ago.
- Today there was this article from the USA Today that states that 46% of first time homebuyers are using 100% financing.
Let's take a moment to look at a few things. Those of you that have been reading this blog for a while know that lots of people are using ARMs and 100% financing to buy property. Take the information above, with all the other information you have heard, along with the info I posted where 82% of the purchase loans in California are either I/O or neg-am, and answer this question:
Tell me how many of the 55,366 houses that were bought by people in San Diego during 2005 are in a good spot. Sure, I don't know all the specifics. I know that many people traded up, put money down, and can afford their house. I'm asking YOU, take a guess? I don't know! If you had to put your money on the table with a bet, where would you put your money?? I think quite a few of these 55,000 people are going to be in trouble in the next few years, especially if they bought with I/O, neg-am, or 100% loans.
But knowing that 82% of the purchase loans in Ca in 2005 were I/O or neg-am, knowing that people are NOT putting money down to buy houses, knowing that the appreciation ranged from -3% to 8% depending on when you bought last year, how many of those people do you think are in a 'good' place after buying what looks to be at or near the 'top of the market'??? How many will be in a good place when their ARM adjusts??
Again, I don't know the answers to these questions. Many of the statistics needed are nearly impossible to gather. I only know the information I read and what I see on a daily basis. I know that incomes haven't doubled in the past 3-5 years...but most property has. I know that rates are going up now...and that is bad news for ARMs. I know that massive appreciation was saving people....now it's not there. I see people not paying credit card bills, I see people not paying their taxes, I see inventories jumping, I see 'reduced' signs....so PLEASE, what am I missing. How are we going to get 10% appreciation this year?!?!?
I look forward to the answers....