Option ARM timebomb set to explode....

Mr_Mumble

U.S. ‘Problem’ Banks Rise to 305, Highest Since 1994, FDIC Says

:think:

mbga9pgf

Mr_Mumble wrote: »

U.S. ‘Problem’ Banks Rise to 305, Highest Since 1994, FDIC Says

:think:

Good article on FT alphaville yesterday:

http://ftalphaville.ft.com/blog/2009/05/29/56408/charting-the-mortgage-crisis/

Generali

From the Alphaville article:

The good news is that the proportion of subprime and Option Arm loans — those most likely to go delinquent or foreclose according to Figure 4.2 — is much lower in 2007 than in 2006.

Does this mean the Option ARM timebomb has been defused?

penguine

Generali wrote: »

Does this mean the Option ARM timebomb has been defused?

I noticed that quote too. But it does go on to say:

The bad news, however, is that with the mortgage market currently in a Treasury-related turmoil, the ability of homeowners to refinance their mortgages at low rates is in danger. This is a big problem, especially since the delinquency rate seems to be spreading to safer mortgages, and the the struggle to find refinancing in the current market (everyone is after it, banks are overloaded with requests, etc.) means many people have yet to take advantage of the low interest rate environment.

The Fed’s lower rates simply aren’t being passed on — and with an Alt-A reset schedule that looks like the one below (chart from Tilson again) — they better figure out a way to do so very soon.

The subprime crisis may be over, but the mortgage one is certainly not.

mbga9pgf

penguine wrote: »

I noticed that quote too. But it does go on to say:

The problem is, they arent going to be able to refinance; many option ARM mortgages in particular are approaching between 110-125% (40-60% making minimum payments) of the original loan amount, in other words, before the price correction has been accounted for, the loans are are already in serious negative equity.

These people simply will not be able to get a lower finance deal, because of the stupid, stupid way in which these loans were repaid. Negative ammortization - What the hell were they thinking?

If I was a bank, last thing I would be doing is refinancing loans that are approaching 150% of the value of the home!

StevieJ

mbga9pgf wrote: »

If I was a bank, last thing I would be doing is refinancing loans that are approaching 150% of the value of the home!

What is the alternative, repossess the house

mbga9pgf

No, the alternative is to tell them to F*ck off, as the mortgage is with another bank what was stupid enough to lend the cash in the first place.

THe banks that currently own the mortgage are going to have no other option, as Option arm is no longer an option for refinance and if their client is refinanced at 150% of what they originally borrowed at, its going to be non-conforming and the client will see around a double to tripling of the monthly mortgage payment. They aint going to be borrowing at 1 or 2% above base with a mortgage that would make NRs 'Together' product look quite stingy!!!

Nice!

It almost funny how big a pickle us humans can get into.

Generali

StevieJ wrote: »

What is the alternative, repossess the house

What happens in reality rather than in BB-Land (as I think you are hinting at) is that the bank that gave the original loan will refinance at a little over the SVR if they can. Banks hate foreclosing especially on clients who have negative equity - foreclosure is expensive, especially when you know you are not going to get your money back.

It's pretty logical really. As a bank you'd be better off refinancing at 100% of the value of the equity (ie writing off a portion of the loan) than foreclosing.

StevieJ

mbga9pgf wrote: »

No, the alternative is to tell them to F*ck off, as the mortgage is with another bank what was stupid enough to lend the cash in the first place.

OK, they will remortgage with their current bank, don't see how it can be in the banks interest to reset the mortgage at a rate the housholder cannot afford to pay.

mbga9pgf

Generali wrote: »

What happens in reality rather than in BB-Land (as I think you are hinting at) is that the bank that gave the original loan will refinance at a little over the SVR if they can. Banks hate foreclosing especially on clients who have negative equity - foreclosure is expensive, especially when you know you are not going to get your money back.

It's pretty logical really. As a bank you'd be better off refinancing at 100% of the value of the equity (ie writing off a portion of the loan) than foreclosing.

BUT... as we know, most of the mortgage holders are currently only making minimum payment, which is like Interest Only but worse... The levels of write down you are talking about are still shocking, around 15-25% on any mortgage reset that comes in... Which is a heck of a lot of cash when you consider 60% of Option ARM holders are making the minimum payments. The total values of these mortgages really are quite huge, as Option ARM although not fully compliant were not seen as 'risky' as full sub-prtime during the boom years, as House price growth would (surely) make up for the neg-am feature of these mortgages.

Any guess what the premium would be for a 100% mortgage in the US at the moment? and any suggestion of what impact

1) Raised market rates would have on already struggling customers (Bond Crisis? Inflation? raised base rate etc)

2) Going from minimum payment Option ARM to full repayment even with a 10-15% cut in the outstanding debt? Bearing in mind the properties once valued are on average 25% below the original loan value?

Its one great big bloody mess. They can push it as much to the right as they want to through bailouts. The bill will need paying sooner or later though.