Mortgage Rates Mixed, Idiot Rate Up Sharply

For the first time since October 25, the 30-year mortgage rate rose (up 5 basis points), this based on a large lender survey. Rates year on year are actually down and the “line” is coming off six straight weeks of decline. All of this begs the question: are those that participated in the refinance frenzy 3 and 4 years ago, most of which did so with riskier arms with riskier still loan to value, dumping into fixed-rate mortgages?

Yes and no.

According to the Mortgage Bankers Association (MBA), refinance applications are at a 15-month high. A good sign that homeowners are making better choices but to quote Lee Corso, “Not so fast my friend.”

First from the MBA- for the period July-September, nearly 5 percent of homeowners were 30 days late or more on their mortgages. The BostonHerald.com reports home foreclosures in Massachusetts soared nearly 300% last month. According to RealtyTrac, 115,000 properties were in foreclosure across the country, a 42% increase from prior year. And Georgia, who owns the nation’s third largest foreclosure rate, reported foreclosures up 99% in the last year.

There’s also a growing trend in California and other places of “short sales.” Short sales are quite simply lenders allowing homeowners to sell their home at a value lower than the mortgage and then settling the debt with the bank. If a short sale doesn’t work, the property goes into foreclosure. Basically, short sales are caused by lenders (appraisers) over-valuing property, the homeowner financing based on that false value and when the “value” plummets, homeowners are stuck with a home that’s worth less than the mortgage value, and are stuck with escalating payments due to their variable rate mortgage.

Historically speaking, none of this is new (see “1980’s). What’s disturbing is that Americans have awfully short memories and tend to have an unwillingness to learn from our past. You would think that even the dot-com stock market burst in 2001 would provide a lesson for irrational homeowners who refinanced with exotic adjustable rate mortgages, cashed out huge second mortgage loans based on over-inflated property values, and then used that money to dig themselves into an even deeper hole.

It’s what Alan Greenspan referred to as “irrational exuberance” when commenting on the stock market toward the end of the bubble. It’s this irrational exuberance combined with a woeful financial literacy level in this country that will doom us to repeat our mistakes ad infinitum. We owe it to future generations to address both of these issues. Shame on (some) lenders too who fuel the fire by foregoing the fundamental principle of risk tolerance to turn loans quicker and in greater numbers.

1. Approach wall. 2. Slam head into wall. 3. Repeat.

All aren’t to blame. There certainly are those caught up in unfortunate circumstances- those that perhaps lost their job (but were in over their heads to start) or those first time home buyers who saw the opportunity and maybe got caught up in not being able to afford the payments once the adjustable rate adjusted. Hard to fault those folks. Home ownership, after all, is the American dream.

It’s not all bad news either. For the first time this decade, more people are leaving California than going in. In 2002, the median home price in California broke $300,000. Today, a starter home in most counties is $300,000. The median price for a home in Southern California last month was $484,000. This in combination with ridiculous traffic, earthquakes, and wildfires is presumably bringing people to the realization that maybe they should get the F out of California.

And from all reports, it appears the speculators that have been driving up real estate values in California and Florida have left the party. Good riddance. Unfortunately, the people left dragging their tortilla chips across the crusty part of the dip bowl and clutching their lukewarm beer are overextended homeowners who can’t afford their rising mortgage payments, who’s house isn’t worth what they owe, and who have long ago spent the false equity they tapped into. Hope that the imported brazilian coconut scented tile carried on the backs of peasants to your doorstep looks good in the foreclosure brochure.

Could be headed for some rational (albeit painful) lesson learning. Let’s hope we’ve got longer memories this time around.

You’re welcome.