Option ARM timebomb set to explode....

mbga9pgf

baileysbattlebus wrote: »

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.

Dunno if it is true, but if it is, wouldnt surprise me if there were some nasty shocks on a few balance sheets out there.... :eek:

penguine

baileysbattlebus wrote: »

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

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.

They can only be 5% in negative equity in order to get refinanced.

From an article in the Washington Post:

But the program is limited to borrowers who owe no more than 105 percent of the value of their home and have a loan backed by Fannie Mae or Freddie Mac. According to FirstAmerican CoreLogic, a research firm, about 1 million homeowners with loans backed by those companies are too far underwater to qualify.

And while homeowners can reduce their payments under the refinancing program, it will not affect how much they owe for the house. Home values are expected to continue to fall through this year, pushing more people underwater and putting them at higher risk of foreclosure.

("Underwater" means in negative equity.)

mbga9pgf

Another nice (up to date for those cynical bulls) graph to visualise carnage yet in store....



No end to Credit Crunch Till March 2012 according to this.

Lots of time to save and watch prices collapse.

Generali

mbga9pgf wrote: »

Another nice (up to date for those cynical bulls) graph to visualise carnage yet in store....



No end to Credit Crunch Till March 2012 according to this.

Lots of time to save and watch prices collapse.

I think you forgot the link.

bubblesmoney

Generali wrote: »

I think you forgot the link.

no i think it is a prob with mse software. i have noticed on prev occassions when i posted graphs that they would initially get displayed but after an hour or so get blocked with the x icon seen in the post u responded to. it seems to be some glitch in mse software or the other site from where the visual is sourced from seems to be blocking its cut pasting on other websites. might be the latter i think.

purch

blocking its cut pasting on other websites

We can't have that !!! :eek:

Without 'cutting and pasting' where would this forum be ????

sabretoothtigger

use http://tinypic.com to host the picture

penguine

From today's Moneyweek:

"We're about to have a whole wave of option ARMs", Rick Sharga of RealtyTrac tells the newswire. "These will probably default at rates even higher than subprime." Already a further $40bn-worth of home loans have payments 90 days or more overdue – suggesting there are a lot more foreclosures to come.

mbga9pgf

Hate to say "I told you so"....

Juicy bit at bottom:

There's a clear lesson for the UK here, as Allister Heath says in City AM this morning. Our crash began a good year or more after America's, and yet some pundits are already lining up to suggest that it might already be as good as over. They're wrong. "House prices can fall by far more and for longer than people usually imagine."
And our own banks made plenty of bad loans during the housing boom too. Even the comparatively saintly Nationwide reported this morning that full-year profits had halved, partly down to a sharp rise in provisions for bad debts.
With unemployment rising, and both banks and consumers more concerned about getting rid of existing debts rather than taking on new ones, the housing markets on both sides of the Atlantic have a long way to fall before we see any sign of a genuine recovery.

sabretoothtigger

half their profits went to pay for companies like b&b. I believe they could have this money returned at some point depending on how bad bb debt turns out to be