Option ARM timebomb set to explode....

mbga9pgf

It will have done, but as we well know, governments typically underestimate the effects of such large crises. If these resets hit harder than expected, its going to have a massive effect on the market, due to the change in sentiment. You cant have the head of the IMF talk about economic inflexion points to then say 'we are back in the mire' without the markets taking a massive hit, LIBOR especially, not to mention global equity values. If this truly blows up, like I believe it will, its going to set back the global recovery by 2-3 years.

baileysbattlebus

When you take out the mortgage you chose a payment option every month, there are 4 of them - and depending on your circumstances that month, you decide which option to pay.

1. Minimum payment - usually less than the interest due - the unpaid interest gets added to your mortgage balance.
2. Interest only payment - as it says it covers the entire interest due and no capital
3. Fully amortized payment - the same a repayment mortgage payment here - pay this every month and your mortgage will be paid in 30 years
4. Full 15 year amortized payment - pay this and your mortgage will be paid off in 15 years.

I think it offers quite a lot of flexibility tbh, if are self employed and on a fluctuating income - but in the wrong hands - oops

They have historically low interest rates in the US at the moment - I read somewhere that the reset of rates could have very little impact on a lot of the loans because interest rates are low. And because of that it is taking longer to reach the cap where a reset kicks in. Delaying the inevitable perhaps - but delaying it none the less.

Option adjustable-rate mortgages aren’t imploding as quickly as predicted because interest rates remain at historic lows, but resets are likely to pick up next spring, according to Credit Suisse.

Keith Gumbinger, vice-president of HSH.com, a publisher of loan information in Pompton Plains, N.J., said the lower interest rates have helped to diminish the option ARM problem. But it remains unclear how many option ARMs are left to reset and how many borrowers will be able to get out of the loans before it's too late. Moreover, by the time they do reset it is unclear whether the economy will be better off. If home values and unemployment continue to weaken, it will become even harder to refinance. But the delay in resets gives some motivated borrowers time to work with lenders and negotiate a solution.
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“I don’t think this is going to be the tsunami that was forecasted a few years ago,” says Keith Gumbinger, vice-president of HSH.com, a publisher of loan information. “But it’s probably bigger than a ripple in a pond.”

But real estate analysts were predicting that many option ARMs would reset sooner as loan balances hit specified principal caps, typically 110% to 125% of the original principal. The decline in interest rates means that it would take much longer to hit the principal cap and many borrowers will instead face a reset only at the five-year mark

And the homeowners who are holding option ARMs when the wave of resets hits won't face as big a shock because interest rates have fallen, adds Fratantoni. "Interest rates have come down to the point where the resets that are going to occur are going to be a bit of a non-event," he says. "Very few borrowers will experience the recast." But Nicholas Chavarela, managing attorney for Orange (Calif.)-based America's Law Group, which represents borrowers negotiating modifications, says banks remain reluctant to reduce principal for underwater borrowers

There have been lots of changes since last year.

mbga9pgf

I agree less of an event, but certainly still a significant one. Tell me this; which banks will take someone wanting 110-125% of the value of their home today and give them a new mortgage? This problem has not gone away, it has been delayed and only slightly defused. We still have a situation whereby 80% of option arm holders from 2007 have mortgages that are growing each month, every month because 80% of option arm holders from 2007 are making the minimum payments to stay above water.
These loans are growing, base rates are practically 0% and unemployment in the USA still has a long way to go. As to a recover mode that is systemic of anything less than aenemic growth, I cant see one. I am a pessemist, yes.

Unless the US manages to get these option ARM holders paying off the capital on these mortgages, the problem has not gone away. All that has happened is it has been delayed 12, possibly 18 months tops. Want to possibly guess what IRs will be doing in 2012, after all this QE is in the economy? I think option arm mortgage holders resetting to max ammortization with a loan 125% of their original size may have a few issues making payments. But, as I said, I am apessemist.

baileysbattlebus

I agree with you it has been delayed by 12 - 18 months - and I do agree that if you have an "upside down" mortgage it will be difficult to refinance - and even if they were able to a lot probably couldn't afford the repayments on a new loan.

But there is some help for some of them, at the end of March Pres. Obama introduced yet another homeowner stimulus plan

Under this new stimulus mortgage plan home owners will be helped in two different ways. First if you are currently in a Sub prime adjustable mortgage and have late payments and are in danger of losing your home there is hope. The plan will give cash incentives to your current mortgage holder to modify your ARM loan to a fixed rate loan and reduce the rate.

The other form of help in the Obama stimulus will be extended to people who are current on their mortgages but are now in a situation where they owe more then the home they live in is now worth. For these people the program will let them refinance up to 105% of their home value. The only catch is the loan has to be a Fannie Mae or Freddie Mac conforming mortgage and you must be current on your payments.

I'm not sure how much help wil be availabl to Option Arm holders - if they are in negative equity - it looks as if there could be some.

I'm not really a pessimist but it could be a bit like King Canute holding back the waves. Time will tell.

mbga9pgf

Either way, if the fed/govt pay for this as part of a bailout = increased taxation down the road.

Makes very little difference in reality when the other option (no pun intended) is for the government to recap failing banks due to stupid loans they issued between 2005-2007. Still = increased taxation, proiblems with government debt (500 billion option arm latest count, high % default rate) means Obama is definately going back to senate sooner or later asking for more cash. That is not commensurate of the market view that the global economy is in recovery.

AS soon as they realise that (in my mind as a pessemist) there will be some significant market corrections to the bond market as well as equity markets globally. Not to mention further house price falls.

Very valid points though and I thank you for bringing them to my attention.

ruggedtoast

Generali wrote: »

To put it another way, how many that have reset already have been foreclosed?

I'm sceptical of things that are going to be a disaster that haven't been reported in the FT or The Economist in any particular depth.

I remember The Economist, I think in 2007, stating that the previous decade of hpi had been the closest thing to a mass lottery win Britain has ever seen. The article then went on to fret about some minor government policy change the author was worried about jeopardising this.

I remember reading it quite clearly. I was in the bath of my rented flat and the electric tank that cost a fortune had run out of water again. The pages had gone all soggy.

Anyway, thats why I cancelled my Economist sub - they didnt predict any part of this crash, to my understanding anyway, and continued to ignore it for a good while after it had started.

ad9898_3

I'm with you on this one mbga9pgf, others may disagree which is fair enough, taking the p*ss though like Steve is doing is unacceptable, look at the state the country is in now, look at what has happened to the banks, GDP, housing market (over 20% down)... etc.

If someone on here in Spring 2007 had said all of the above would be happening in less than two years, I'm sure we would have had many a 'rolling head smiley' going on, all the bulls would have been ridiculing anyone who said it would happen, yet it has happened and no one is laughing now.

The OP has some evidence to suggest that what he is saying may well happen, I would suggest anyone thinking of taking the p*ss out of him think very clearly about what has happened in the last 20 months.

StevieJ

ad9898 wrote: »

I'm with you on this one mbga9pgf, others may disagree which is fair enough, taking the p*ss though like Steve is doing is unacceptable, look at the state the country is in now, look at what has happened to the banks, GDP, housing market (over 20% down)... etc.

Fair enough, making a point, but not the same one every week :rolleyes:

mbga9pgf

StevieJ wrote: »

Fair enough, making a point, but not the same one every week :rolleyes:

I am shotgunning this topic on here to bask in the shaudenfreude glory in 18 months time Steve!

baileysbattlebus

mbga9pgf wrote: »

Either way, if the fed/govt pay for this as part of a bailout = increased taxation down the road.

Makes very little difference in reality when the other option (no pun intended) is for the government to recap failing banks due to stupid loans they issued between 2005-2007. Still = increased taxation, proiblems with government debt (500 billion option arm latest count, high % default rate) means Obama is definately going back to senate sooner or later asking for more cash. That is not commensurate of the market view that the global economy is in recovery.

AS soon as they realise that (in my mind as a pessemist) there will be some significant market corrections to the bond market as well as equity markets globally. Not to mention further house price falls.

Very valid points though and I thank you for bringing them to my attention.

Another issue with option arm mortgages is the way the banks account for them or rather account for the payments they receive.

If the borrower is paying the minimum payment - the bank under current accounting rules (GAAP) can account for the full amount on it's books.

So if the minimum repayment is $1000 and fully amortized amount is $1500 the bank can account for $1500 - claiming revenue they never received, boosting their "profits".

That could be more worrying than the potential defaults - if the banks haven't already declared them. I don't know if they have or not.

So perhaps it will be bit more than a ripple on the pond.