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Saturday, August 19, 2006 1:12 AM

Take a letter Maria

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The Baltimore Sun is reporting that Countrywide is sending letters to Pay Option ARMs holders.

Countrywide Home Loans, quietly has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company's popular "PayOption" adjustable-rate mortgages.

The letters explain that "this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly."

A model letter provided to me by Countrywide includes this hypothetical example of what could be ahead for a California homeowner currently making only minimum payments monthly on a $402,000 loan.

The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.

If the loan reset at today's rates, the letter explains, the full payment required would be $2,887.50 - more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper, making the potential payment crunch much worse.

John G. Walsh, a senior official at the federal Comptroller of the Currency, recently described his agency's concerns about poorly informed borrowers who don't realize that their artificially low monthly payments won't continue indefinitely.

"We've had consumers tell us they didn't know that after making 60 minimum payments on a [payment-option loan], they would owe more than they did when the loan was brand-new. They should certainly understand the basic bargain: The price of a low payment now is a much higher payment later.

"I think it goes without saying," added Walsh, "that someone, at some point, should have explained this" to borrowers with these loans.
Cramer: Pay Option Arms are Prudent

It seems like the good folks at Countrywide were not tuned in to Cramer when he said Panic Over Option ARMS Is Just Noise.
The borrowers are not morons. They can read the papers, too. They recognize that homes aren't selling.

I would bet that most of these borrowers are simply younger people with new jobs who are correctly taking advantage of a low rate. People who have taken this rate have been very right. The long end hasn't gone up. It seems like it won't go up now. So while they build up some savings with the low rate, they get stronger down the road and then can take the higher rate.

The media call it dangerous. I call it prudence.

These loans work as long as employment stays steady. The fact that it has tells me not to worry, that this is just another phantom problem not worth fretting about.
Prudence? No worries? Phantom Problem? Does anyone take this guy seriously?
How long is employment supposed to say steady and how many people are now upside down and trapped? Look at the comments from the Comptroller of the Currency about people not understanding how these loans work.

Lead Balloons in Virginia

The letters in Virginia are probably more likely to be foreclosure notices than anything else.
The Northern Virginia Real Estate Guide has some choice responses on What the insiders are saying about the local market.
Whenever I engage in a conversation with another local agent (especially those with several years in the business), I always get around to the question: What's going on with this market? I had one of these with an agent we are working with on the other side of one of our transactions. Her answer: "I don't know. I've been in this business for 36 years and experienced a lot of ups and downs. I have never seen it like this."

Responses from other agents include:
  • I'm not taking any more listings.
  • I can't afford to keep advertising property when the seller is so rigid on price.
  • I'm lucky I have buyers.
  • I've shown one buyer client over 100 homes and they still can't decide. (I'd be confused too if I looked at even 25% of that number)
  • Create two letters to listing clients: The first one to send is "you have to lower your price to sell. If they don't, send the second one asking to terminate the listing."
  • Only take a listing if the seller is willing to set their price at least 5% below anything that has recently sold around them. That's what it's going to take to attract buyers in this market.
  • My buyer can wait to watch the market come down even more. (I hear this on every low contract offer we get).
  • I have sellers that can't take a contract offer because they are upside down on their mortgage.
The Real Estate Bubble is turning out to be a lead balloon. I just hope it doesn't fall on my head. The next 12 to 24 months are going to be interesting indeed as we work through this cycle.
Here's a different twist on a letter writing campaign.

Create two letters to listing clients: The first one to send is "you have to lower your price to sell. If they don't, send the second one asking to terminate the listing."

How many real estate agents thought they would be rejecting listings a year ago?
Is there any good reason to suspect this cycle will be over in 12 months?
Can agents survive another 24 months like this?

Mike Shedlock / Mish

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