My 1st Million At 33 – yes, you can do it too

I have blogged about “different ways for a busted refinancing plan” back in 2006 at the height of housing market. I argued that once the housing markets fall, most of the real estate “investors” will NOT be able to refinance out of their payment troubles. It was very clear to me that a housing Ponzi scheme simply cannot last forever, and was destined to pop. Of course, according to Greenspan, Bernanke, Wallstreet, and traditional news media, nobody could have seen the financial crisis coming.

I definitely thought that things would be worse in the housing markets. Due to various factors that I didn’t forsee, including Obama’s home affordability programs, delays in foreclosure processes by banks, and a dramatic drop in the interest rate curve, things are not terrible as of now. In fact, in 2009, housing markets actually went up (at least in California), sucking in the last bunch of ever-hopeful real estate “investors”. Regardless, numbers won’t lie, and let’s see how the negative amortization or option ARM homebuyers are doing.

Below is a summary from the monthly payment history based on a hypothetical case that I’ve made up for a California home ($500K, 20% down). I think it is pretty representative. You can get the original complete Excel spreadsheet here. All the interest rate data are from X-mortgage. I’m listing both MTA and COFI indexes which are the two most common indexes for option ARM:

Date	MTA (%)	11th District COFI (%)	Monthly payment (MTA)	Balance (MTA)	Monthly payment (COFI)	Balance (COFI)
2004	1.2383	1.802	1,286.56	400,042.88	1,286.56	400,230.78
2005	2.5042	2.515	1,383.05	402,760.80	1,383.05	403,981.61
2006	4.1425	3.759	1,486.78	410,981.87	1,486.78	411,293.82
2007	5.0292	4.224	1,598.29	424,437.96	1,598.29	422,556.80
2008	3.5283	3.111	1,718.16	436,514.40	1,718.16	432,092.15
2009	1.34	1.38	2,332.69	436,960.64	2,325.33	433,770.30

From the original teaser payment of $1286.56, the payment increased 7.5% annually, and is recast to about $2200 after 5 years from 2004. I think the more aggressive homebuyers who couldn’t cover the annual payment increase of 7.5% would have dropped out already. They either
1. sold and made some profits,
2. refinanced into another option ARM before housing markets dropped in 2007 (which will cause more problems later in 2012),
3. or defaulted already.
The more “conservative” homebuyers who were able to sustain thru 4 years of annual payment increases of a total of 30%, now will be facing an additional payment shock of 28% from $1718.16 to $2200. That is a total increase of 71% from the original $1286.56.

Needless to say, an increase of 71% in 5 years will be huge for anyone. Very few family will be able to make it thru a combination of salary increase, second job, and/or having non-working spouse going back to workforce. Unfortunately, refinancing to 30-years loan at today’s 4.75% will not be an option either, since the monthly payment for 30-years is about $2200, the same as the recast option ARM loan, if not more. I originally thought that these people probably would have problems with LTV or loan-to-value ratio. But Obama’s home affordability program has “solved” the LTV problems for these most of these homeowners. The monthly payment issue is still there. One cannot make an unaffordable home in the first place to be affordable.

Looking forward next year, once the home affordability program expires in mid-2010, we will probably get more defaults and walkaways from homes. Due to Bernanke’s cutting of interest rate, and a huge buying program in both treasury and mortgage market, current interest rates are temporarily held down. If the option ARM indexes like MTA and COFI rise up to 3% for example, the monthly adjustable payment will go up by another 25% to 30%. I don’t think the housing markets will recover anytime soon due to this impending supply of homes (from defaults of the option ARM loans).

So what should you do if you are one of the option ARM homeowners? There are many sites & articles that talks about foreclosure options. In my opinion, short sale would be the best choice (if you have this choice), since you won’t be liable for the deficiency judgment, and it will hurt your credit report the least. The second best choice is loan modification, although not many can negotiate a good deal with banks. The rest of the choices such as foreclosures are not ideal, but it’s probably earlier the better under the assumption that it does not affect your job prospects based on a much worse credit report.

Here is some of good sites & articles that I’ve found on foreclosure-related options. Some of the site owners are very helpful, and may be able to provide you with needed advice or services:

• Foreclosure option networtk. Hanna was particularly helpful to me on a couple of nasty legal questions.
• Foreclosure options from MSN
• More info on various foreclosure options from foreclosure university.