10 Year Interest Only Loans: Don’t Rule Out Another Bursting Real Estate Bubble
Don’t Rule Out Another Bursting Real Estate Bubble
Every day, there are headlines announcing the housing crisis is over, that home prices are recovering and that Las Vegas is out of the woods (or nearly out). On the surface, these largely positive headlines are accurate, but it may be too early to celebrate.
A few sleeping giants in the mortgage and finance industry have started to stir. Ten-year notes are coming due, the Troubled Asset Relief Program is ending and the Nevada Foreclosure Mediation program is running out of funding. Our fragile economy might be able to shake off one of these events, but all of them at once? That’s not likely.
• 10-year notes: Year over year, housing prices in Las Vegas have risen, but they’ve been mostly flat or even slightly down this year. More important, upper-middle-class home prices are down nearly 40 percent from their peak values in 2006. This may not seem significant, but it’s important to remember that a favorite product of purchasers and refinancers in 2006 and 2007 was the 10-year, interest-only adjusted-rate mortgage. With this loan type now adjusting into principal and interest payments, borrowers are seeing their payments double or even triple overnight. With homes still underwater and Nevada income levels still down more than 15 percent from the 2007 peak, homeowners aren’t able to qualify for traditional refinance programs and can feel stuck with new payments they can’t afford.