"Gambling With Fire"

From the Modesto Bee:

Chris Harrigfeld, the president of California Mortgage Associates in Modesto, [said] the subprime market is due for upheaval.

"The subprime market as it has existed in the last five years will not exist in another 12 to 18 months," Harrigfeld said. Banks won't underwrite such risky loans, he said, so lenders won't offer them. Harrigfeld said that as subprime loans default and banks foreclose on homes, they could drag down the real estate market. As those homes go back on the market, they lower prices across the board, he said.
...
In California, subprime woes aren't confined to Modesto. The top 10 U.S. areas with the highest percentage of delinquent subprime loans include Merced, Stockton-Lodi and Sacramento — all cities that had soaring home values.

An expert on the valley said valley cities may have a higher percentage of subprime loan problems because home appreciation outstripped wage growth for several years. "We would see that despite the drop in affordability, the percentage of homeownership would increase," said Richard Cummings, director of research and communication at the Great Valley Center, a Modesto-based growth think tank.

"Now you're seeing the shakeout," he said, because many of the people buying homes during the boom did so by stretching financially, including the use of subprime loans.

Also from the Modesto Bee:

Many people struggling today bought their homes using ARMs or similar financing tools to "get in" on the hot housing market of the past few years, much like the dot-com boom of the late '90s. They counted on continued rapid home appreciation to help pay for a house many couldn't really afford even with a decent job. As the prices of houses climbed, many used the promotional loan rates to get into their new homes.

But those rates are gambling with fire; they're not a tool to be used casually. They are viable if you plan ahead. If.

I speak with many owners of new homes who are beginning to sweat as they watch the ARMs muscle up to higher rates, and wonder where that extra $200 or more a month is going to come from.

Remember the early 1990s, when foreclosures surged and excess housing inventory sat all over Stanislaus County? Sounds familiar.

So what's all the surprise about ARMs? In the end, you always have to pay the fiddler — or the bank in this case — for what you're buying. Simply put, interest rates flex. If you can't afford to pay more than the bottom tier of an ARM, don't take the risk of losing your home. Don't buy what you can't afford.