We are intrigued by this post at Calculated Risk
, which features a graph of mortgage loan originations in the first half of 2007. Here's the graph (click to enlarge):
This comes out of a new report by the Office of Federal Housing Enterprise Oversight
that discusses the implications of raising the conforming-loan limit, now $417k, meaning that Fannie Mae and Freddie Mac could buy bigger loans.
What the graph shows is that the vast majority
of jumbo loans
(>$417k) in the subject period were of the types generally considered to be more risky. A third are interest-only ARMs, while almost 20% more are interest-only fixed-rate loans. Another 13% are negative-amortization loans.
Every one of those loans is designed to allow a homeowner to pay substantially less than the normal monthly cost on a given loan balance. These sorts of loans became essential as home prices peaked beyond normal ranges of affordability. Half of all jumbo loans issued in America in Q1 and Q2 of 2007 were issued in California.
Every one of the non-traditional loans is subject to a degree of "payment shock" when the lower-cost period expires. Only on a fixed-rate, interest-only loan does the homeowner know exactly what the new payment will be.
We can chat all day about how home buyers often know what they're getting into, that ARMs can be part of sound financial planning, etcetera, but the reality is that vast numbers of people holding these loans won't be able to afford them after the payment shock.
The graph already feels a bit like a historical artifact. The OFHEO report notes that, by Q3 of 2007, lending standards changed. Likely the mix of loan types among jumbos is changing now, too. So this may be our last good window on what was going on at the peak.
There's much more in the report (click here to download)
– your insights are welcome.
UPDATE: MBC has twice previously featured graphs indicating the "reset" dates for bulk numbers of ARMs. The first story
was in March 2007, and the more recent story
was in late August.