FDIC Summer Outlook 2006

From the FDIC:

FDIC Summer Outlook 2006(PDF)

The U.S. mortgage market, which for decades was dominated by fixed-rate mortgages, now includes innovations such as nontraditional mortgages, simultaneous secondlien (or piggyback) mortgages, and no-documentation or low-documentation loans.10 Nontraditional mortgages allow borrowers to defer payment of principal and, sometimes, interest and include interest-only mortgages (IOs) and adjustable-rate mortgages (ARMs) with flexible payment options (also called pay-option ARMs, or POs). Although perceived as fairly new, many of these loan types are a repackaging of existing products, marketed again in the 2000s in response to growing demand. For example, record-high fixed rates in the late 1970s and early 1980s stimulated innovation in the form of various types of ARMs. Some of today’s pay-option ARMs are a reincarnation of negative amortization loans that were popular in the 1980s, but then fell out of favor in the early 1990s when rising interest rates and falling home prices in certain areas left some borrowers owing more than their homes were worth.

Rapid growth also has occurred among some of the higher-risk mortgage alternatives within the nonprime arena. As recently as 2002, IOs and pay-option ARMs represented only 3 percent of total nonprime mortgage originations that were securitized. However, the IO share of credit to nonprime borrowers has soared during the past two years to 30 percent of securitized nonprime mortgages, while the pay-option product jumped to a similar share in less time (see Chart 3). Furthermore, the low- or no-documentation share of subprime lending has grown significantly since 2001, from about 25 percent to just over 40 percent.

The growing popularity of nontraditional products may have moved the mortgage credit cycle into uncharted territory. Industry analysts are uncertain how loans such as IOs and pay-option ARMs might perform in periods of rising rates or in stagnant housing markets. Recent media attention has highlighted the risk of payment shock when interest rates are adjusted, or reset, for IOs and hybrid ARM products. Despite favorable delinquency and default trends thus far, analysts fear that the current rising interest rate environment, combined with cooling home price appreciation, will limit borrowers’ options when they face large monthly payment increases. Homeowners who have not built up sufficient equity to either cover the cost of refinancing or pay down additional debt could face delinquency, particularly within the subprime markets.

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19 Responses to FDIC Summer Outlook 2006

  1. Anonymous says:




  2. Anonymous says:

    The sewage is overflowing!

    Nowhere to go but DOWNZO!

    Biggest baddest bubble in history!

    It’s over — Housing CRASH!



  3. My mother just called and told me what they raised her property taxes to. She now will have to pay $9,400 a year for her very small 3 bedroom, 1 bathroom ranch on a busy street

    True, there is no other place she can go for $783 a month in NNJ, but for a first time buyer to pay those insane taxes PLUS carry a mortgage?? Time to leave NJ

  4. Richie says:

    This is no problem. Everyone needs somewhere to live. Baby boomers need second and third homes.

    This is the new way to own a house, to rent it forever by using non-traditional loans! Everyone’s doing it!

  5. I saw a small house in new providence this weekend that was OK and the price was not TO bad, but the taxes with 9k a year! People always pester me to buy, but 9K a year is 70% of my Rent!

  6. Anonymous says:

    Lots of fools getting shocked with double digit property Tax increases. The Fools Didn’t factor this in or the ARM adjustments either or the Gas increases or the utility increases.
    Can you hear it?



  7. Anonymous says:

    Think and don’t be a bagholding fool!

    Want to be underwater go ahead buy!

    Grimster has presented the facts. Listen or be a fool! It’s your bagholding choice.

    A good ole fashion BUST will wipe the arrogant grins off the swindlers faces.



  8. skep-tic says:

    check out the explosion of foreclosures in Boston.

    well educated population with high paying jobs and a dash of old money. Sound familiar? NYC is not immune

  9. skep-tic says:

    foreclosures in Boston up 123% in 2d quarter! 66% across state as a whole (but take out the moderately priced western half of the state and you start to see the total meltdown underway)

    see Boston Globe article:


  10. Anonymous says:

    My hubby says there just aren’t enough suits (RE attorneys or mtg. guys) to go around at all the sheriff’s sales over the next couple of years.

    Thinks it may be a rout on the lower-end sales…they’ll just let them go to bid. Unless banks hire a lot of contract people. I can see Wells Fargo doing that, but not sure about the smaller guys.


  11. Anonymous says:

    don’t kid yourselves, this bust is in the high end, 1m+ wher a lot of stupid money was chasing crappy condo’s/fixer uppers in up and coming neighborhoods! Fed calling in Hedge funds and banks to discuss credit situation according to today’s FT. IMO all about upcoming bust in MBS, Fed wants comfort that banks can indeed survive the sh*t show that’s coming


  12. I had written to Local Legislator about Housing Unaffordability in NJ along with link to following article,

    New Jersey needs comprehensive review of housing policies
    Posted by the Asbury Park Press on 07/21/06

    He responded back with following,

    Thank you for your input. Affordable housing is and has been an important issue for the Legislature. And as the article states, “New Jersey is always
    going to be an expensive place to live.”
    Having said that, there are a number of bills currently pending in the Legislature that seek to assist New
    Jersey residents in buying a new home. One bill is Assembly Bill 470 which establishes a Joint Committee on Housing Affordability. There are many
    others dealing with first time home buyers, low and moderate income requirements and others. You can see copies of these bills by going to http://www.nje.state.nj.us and do a bill search under Housing.

    Again, thank you for voicing your concerns on this issue and I hope you will continue to contact me on other issues of importance to you.

    Assemblyman Kip Bateman

    Well you can either interpret above response as, it’s too expensive, we can’t really do too much about it, or may be something will change in future. Not sure what to pick.

  13. Here is link to Legislature website to the Bill to address housing.

    Establishes Joint Committee on Affordable Housing

    The points I like,

    Soaring housing prices and escalating property taxes have put affordable housing out of the reach of many citizens, particularly senior citizens on fixed incomes.

    Though many on this board do not believe Govt should get involved, I think the Committe mentioned in this bill is good idea. Too many towns are whimping out on their commitments, and there is no oversight. I would personally support this Bill.

  14. RentinginNJ says:


    The best way for government to get involved is to address cost of living issues in New Jersey. After all, the price of a house is just one factor in the equation. This means:
    1-Really reduce property taxes (don’t just shift the tax burden). This means sharing services, pushing back on public sector unions and holding the line on the size of the government.
    2-Encourage private job growth. Reduce the barriers to companies expanding an setting up in NJ.

    As for houses, leave them alone. Let the free market do its job. Government interference will only screw things up further. Besides, as the email said, any assistance program will likely target seniors and the poor, with the middle class just picking up the tab

  15. Anonymous says:

    Countrywide Financial May Be Hit By Option ARM Delinquencies


  16. Roadtripboy says:


    The “let’s form a committee” response is a tired, old one from politicians. It’s the preferred one when they really don’t know what to do about a problem.

    And as others like RentinginNJ have pointed out, it is questionable that government should really get involved in the housing market anyway.

    I also question state government’s involvement in aleviating property tax burdens. Aren’t property taxes determined locally anyway? Until the numerous municipalities are willing to join together to eliminate administrative waste, why should the state care? The state government has its own problems to deal with, top on the list being the budget situation.

  17. jayb says:

    This post has been removed by the author.

  18. RentinginNJ says:

    I also question state government’s involvement in aleviating property tax burdens. Aren’t property taxes determined locally anyway?

    The State has a lot to do with property taxes, although you are right, municipalities need to do their part as well. The State has been consistently reducing funding to municipalities, putting more pressure on property taxes. The State has also has very one-sided pro public sector union policies that make it difficult for municipalities to take any action on their own. For example, if a municipality doesn’t give the police union what they want in contract negotiations, they go to arbitration and the State almost always rules in the union’s favor.

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