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$1 Trillion in ARMs resetting in the next 18 months

Many people chose to finance their purchases in 2003-2005 with an adjustable rate, interest only mortgage.  These not quite subprime loans and not quite A paper loans were marketed by lenders and Realtors as the "way to get in the game" in rapidly increasing markets like Southern California, the Northeast, Florida, and the Southwest.

What does "resetting" the ARM really mean?  Well, the rate charged by a lender for an ARM is based on two things:  the index plus the margin. Common indeces include the London Interbank Offering Rate (LIBOR), the Managed Treasury Average (MTA) and the Cost of Funds Index (COFI). The index is usually pretty close to what the bank's cost of money is. The margin is the bank's profit.  That is how you determine the TRUE rate on an ARM.

Borrowers elected to take two and three year "fixed rate periods" when they bought their homes to give them a bit of "payment safety".  That payment safety is about to turn into payment SHOCK!  Let me explain with a real life example:

I have a customer who bought a home and secured a $400,000 2 year ARM, interest-only, in 2004.  The loan was due to reset in September to LIBOR (around 5.4%) plus a 3% margin.  This means that his rate was due to go to 8.4%.  It would still be interest-only (for another 8 years) but his "start rate" was fixed at 4.875% for two years.  You can do the math.  His start payment was at $1,625 and it was about to adjust to 8.4% for the next year bringing his new payment to $2,800.  That's an increase of some 72%.  Now I don't care how high your income is, a 72% increase in ANY expense is traumatic.  I mean, at least it took three years for a gallon of gas to increase that much.

His refinance was REALLY hard because his home increased about 8% during that period.  We were able to get him into a 5 year ARM at 6% so his payment only rose $325.

Anyway, I digress.  Here's the really scary (or opportunistic) statistic.  There are $330 million in ARMs resetting in 2006 and ONE TRILLION DOLLARS in ARMs resetting in 2007.  Now, fellow lenders, don't lick your chops just yet.  These loans were made back when stated income was truly a "liars loan" and banks have really tightened up on those loans since then.  Prices have risen since then but most of these loans were backed up with HELOCs for 100% financing. 

I estimate that there is some $20 million per day resetting in Southern California for the next 15 months.  WOW!

                                                                                            

Many people chose to finance their purchases in 2003-2005 with an adjustable rate, interest only mortgage.  These not quite subprime loans and not quite A paper loans were marketed by lenders and Realtors as the "way to get in the game" in rapidly increasing markets like Southern California, the Northeast, Florida, and the Southwest.

What does "resetting" the ARM really mean?  Well, the rate charged by a lender for an ARM is based on two things:  the index plus the margin. Common indeces include the London Interbank Offering Rate (LIBOR), the Managed Treasury Average (MTA) and the Cost of Funds Index (COFI). The index is usually pretty close to what the bank's cost of money is. The margin is the bank's profit.  That is how you determine the TRUE rate on an ARM.

Borrowers elected to take two and three year "fixed rate periods" when they bought their homes to give them a bit of "payment safety".  That payment safety is about to turn into payment SHOCK!  Let me explain with a real life example:

I have a customer who bought a home and secured a $400,000 2 year ARM, interest-only, in 2004.  The loan was due to reset in September to LIBOR (around 5.4%) plus a 3% margin.  This means that his rate was due to go to 8.4%.  It would still be interest-only (for another 8 years) but his "start rate" was fixed at 4.875% for two years.  You can do the math.  His start payment was at $1,625 and it was about to adjust to 8.4% for the next year bringing his new payment to $2,800.  That's an increase of some 72%.  Now I don't care how high your income is, a 72% increase in ANY expense is traumatic.  I mean, at least it took three years for a gallon of gas to increase that much.

His refinance was REALLY hard because his home increased about 8% during that period.  We were able to get him into a 5 year ARM at 6% so his payment only rose $325.

Anyway, I digress.  Here's the really scary (or opportunistic) statistic.  There are $330 million in ARMs resetting in 2006 and ONE TRILLION DOLLARS in ARMs resetting in 2007.  Now, fellow lenders, don't lick your chops just yet.  These loans were made back when stated income was truly a "liars loan" and banks have really tightened up on those loans since then.  Prices have risen since then but most of these loans were backed up with HELOCs for 100% financing. 

I estimate that there is some $20 million per day resetting in Southern California for the next 15 months.  WOW!

Ten Rules to Buying Property in Mexico

I've made loans to Americans buying resort properties in Mexico since 1998 and I still do it today. Now, you may have heard lots of stories about the horrors of buying property south of the border and I'll admit, there are a few of them. Guess what?  It's because the buyers didn't listen!

Here are 10 rules to Buying property in Mexico:

1- Get title insurance from an American Company.  Stewart Title's been insuring property in Mexico since 1994.  First American and Land America insure down there also.   Mexican sellers (and their agents) will tell you you don't need it but do NOT listen.  You need title insurance or NO deal.

2- Check to see how you have to hold title.  The "restricted zone' for foreigners is 100km from a border and 50km from the coast.  Baja California peninsula is, in effect, mostly in the restricted zone.  You can hold property fee-simple in outide of the restricted zone but need to use a bank trust or fideicomiso

3- Get a referral from someone who owns property about a reputable Realtor down there.  There are no licensing requirements for Realtors but many belong to AMPI which is an organization similar to NAR. In fact, NAR announced an association with AMPI and is having a joint conference with AMPI.

4- Understand the role of a notario publico as a title search agent, closing agent, and county recorder.

5- Get all contracts, promises, representations, and warrants in English (or have them translated).  Any reputable firm will have them available.

6- Use an American escrow company.  The title company can offer their "in-house" escrow company; use them.

7- Examine the document called the condominum regime (regimen de condominio) to see owners' right, obligations, and restrictions.  These are similar to our CCRs.

8- There is no requirement for sellers-disclosure in Mexico.  Caveat Emptor!

9- Mexican Corporations have restrictions against foreign ownership now. Using a Mexican Corporation to buy property isn't as advantageous in the past.  Don't be awed by the Mexican corporation that comes with the property; it may be useless to you.

10- Pay your taxes !  The IRS is called Hacienda in Mexico and they will lien and foreclose on your property if you do not file or underpay your tax bill.