When Doom first opened it’s doors back in 2006, I would often rail against the adjustable rate mortgages (ARMs) and interest rate buydowns offered by the builders. These programs basically disappeared when the housing market went bust. We saw that often people only qualified for the first year or two- then payments rose beyond their ability to pay. Here was a timely warning from 2007:
You have a 1-in-3 chance of losing your house to foreclosure if you got an adjustable-rate mortgage, or ARM, in 2004 through 2006 that had an initial teaser rate of less than 4 percent.
If you got a subprime ARM in that period, you started out with a higher rate, and that puts you at less risk. You have a 1-in-8 chance of losing your home.
That’s the takeaway message from a densely detailed report by Christopher Cagan, director of research and analytics for First American CoreLogic. Cagan’s study focuses on 8.4 million ARMs that were originated in 2004, 2005 and 2006. About 1.1 million of those borrowers will lose their homes in the next six to seven years because of payment shock brought on from rate resets or loan recasting, Cagan estimates.
That warning was based on the assumption that home prices would remain flat after 2006- as you’ll recall, that didn’t happen. Cagan also indicated that if prices fell further, numbers would be worse.
Based on what we saw back then, I thought the buydown thing was a thing of the past. Imagine my surprise when L forwarded me this ad from Beazer:
Example starting interest rate and APR are for illustrative purposes only and is based on sales price of $130,000 and may vary based on borrower’s credit score, actual closing costs and other variables. Scenario is based on a 5/1 fixed-period adjustable-rate FHA loan (“ARM”) with a 3.5% borrower down payment and a starting 5-year interest rate of 3.125% (3.025% variable APR), resulting in a starting monthly payment of $542.77 for the first 5 years which includes principal, interest, taxes, insurance, and estimated private mortgage insurance premium only; any other fees such as HOA are extra and will result in a higher monthly payment. APR assumes no change in index after the 1st 5 years. Rate effective 11/29/2010 and subject to change without notice. After completion of the 5-year fixed period, the loan will be fully amortized over the remaining term as an adjustable-rate mortgage that adjusts once a year. ARM rates and monthly payments are subject to increase after the 5-year fixed-rate period of 30-year loan term. Offer available only through Bank of America Home Loans. buyer may finance via any qualified lender but will not be eligible for this offer. Scenario assumes the buyer has excellent credit, sets up a tax and insurance escrow account and pays estimated closing costs of $2,531.76. Minimum credit scores apply. Not all applicants will qualify. To qualify for this offer, buyer must sign a purchase agreement between 12/01/2010 and 12/31/2010 and close escrow per terms of contract. This offer subject to underwriting guidelines which are subject to change without notice, and available only for owner-occupied homes, non-owner-occupied homes are subject to additional restrictions and qualifying requirements.
Since buydowns worked out so poorly the last time around, is this really such a good idea?