Day of Reckoning Looms For Many Mortgage Holders

Hindsight, they say, is 20-20.

California mortgage holders are starting to see this. Up close.

With the benefit of two years of hindsight, it’s clear that June 2005 was the height of the wacky season for the San Diego housing market, which has potentially fearsome implications for home prices this summer.

By June 2005, the San Diego mortgage market was beginning to fray. Home prices, which had been growing by double-digit percentages for more than five years, dipped to 9 percent appreciation in May and 6 percent in June.

Home transactions in June were 9 percent lower than the year before, foreshadowing a major slowdown. Nevertheless, there were thousands of eager buyers.

And if they couldn’t afford a 30-year fixed-rate California mortgage loan with a 20 percent down payment, there were adjustable rates, zero down payments, interest-only loans and negative amortization.

Nearly 83 percent of new home buyers in the county used adjustable rate mortgages in June 2005, an all-time high representing about 4,700 buyers.

Nearly 63 percent of mortgage refinancing activity used adjustable rates, down just slightly from the record-setting 65 percent in May.

“An 80 percent rate for adjustable mortgages was so far out of the market that it should have raised red flags for lenders,” says Raphael Bostic, associate director of the Lusk Center for Real Estate at the University of Southern California.

“But because of the continuing appreciation of home prices, lenders by and large felt that they were somewhat insulated from any particular hardship.”

For consumers, those adjustable rates were very enticing. You could get a five-year jumbo adjustable-rate mortgage for 5.375 percent, compared with 5.875 percent for a jumbo 30-year fixed-rate loan.

Any loan above $417,000 is a jumbo mortgage. Depending on the value of the loan, that 0.5 percent difference could save hundreds per month for the borrower.

The problem was that those were adjustable mortgages. And the rock-bottom rates had nowhere to adjust but upward. For some people, it didn’t require hindsight to spot the risks.

“People are not looking at what they are going to have to pay over the long term,” warned Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies, in an article that ran in this newspaper that June.

“They are asking ‘What is the lowest possible payment I have to make over the next 12 months so I can get in?’ ”

Retsinas warned that if the economy hit a soft spot, housing could suffer a “painful” downturn. Which is exactly what is happening.

On many adjustable-rate mortgage loans, the day of reckoning has arrived. Many mortgages were arranged under the proviso that the loan would not be adjusted for two years.

The two-year anniversary for loans extended in June 2005 is this month.

“Particularly for the [bad credit mortgage] market, borrowers took out home loans that were fixed for two years and then adjusted pretty abruptly,” said Andrew LePage, analyst with DataQuick.

“People were already stretching to make their monthly payments, but it increasingly looks like some folks can’t handle the reset.”

This summer will see a major wave of adjustable-rate mortgages ratcheting upward. Not just from June 2005, but from following months as well.

According to DataQuick, adjustable rates constituted between 76 percent and 80 percent of all new mortgages between July and September, representing 21,400 purchases.

Wealthy borrowers will find an easy way out of the upward adjustments by applying for a mortgage refinance their homes.

But what about the rest of the mortgage holders?

Continue reading in the San Diego Union-Tribune …