Option ARM timebomb set to explode....

mbga9pgf

StevieJ wrote: »

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.

Many of these banks dont exist any more.... What are they supposed to do, forever allow the mortgage owner to make payments below the level of the interest portion of the mortgage and allow debts to get ever bigger whilst the value of the asset tumbles?

Its not in their interest. But the only way they can make the problem go away is to either repo the customer, get them to pay a higher mortgage so they are actually paying it off instead of letting it grow, or refinance the mortgage again at a higher rate.

As I say, its a big bloody mess.

mbga9pgf

More support for "option ARM" Armageddon

http://finance.yahoo.com/tech-ticker/article/243889/Beware-Crisis'-Next-Wave-Option-ARM-Foreclosures-More-Debt-Defaults?tickers=XLF,FAS,C,^GSPC,JPM,BAC,^DJI

Not green shoots for next 2 years?

Juicy bit 4:00 in, "No recovery until Q4 2010"

Generali

mbga9pgf wrote: »

Many of these banks dont exist any more.... What are they supposed to do, forever allow the mortgage owner to make payments below the level of the interest portion of the mortgage and allow debts to get ever bigger whilst the value of the asset tumbles?

Its not in their interest. But the only way they can make the problem go away is to either repo the customer, get them to pay a higher mortgage so they are actually paying it off instead of letting it grow, or refinance the mortgage again at a higher rate.

As I say, its a big bloody mess.

Banks are paying tiny amounts for their funding right now which means that they can offer very favourable refinancing to problem customers. Indeed you can bet that a condition for the Government helping the banks very generously is that they 'solve the problem'.

The last thing that Governments want is armies of articulate, motivated middle-class people losing their homes and jobs so they will do almost anything to try to stop it happening.

My feeling is that all this is going to end in tears but that doesn't mean that scaremongering is helpful.

mbga9pgf

Government bailouts dont assist those in this much negative equity. Its in their rules.

So, what are their options? Where will they get all of this cash from to magically refinance 300 Billion in option arm resets alone, that is accounting for the fact that 40% are making IO or repayments, so doesnt account for any further jobs market deterioration or other economic shocks?

The bond markets are starting to look increasingly shaky and the appetite for all this state debt I personally think is starting to wane.

I agree, scaremongering is not helpful, but neither is the other alternative, burying your head in the sand and pretending that the credit crunch is about to end. People who think that the global economy is about to spring green shoots need to get a dose of reality. I am not saying it is impossible to make money out there, far from it. But unless you have a good clue about what is happening to global markets and what is about to , how can you make an informed decision?

Generali

mbga9pgf wrote: »

Government bailouts dont assist those in this much negative equity. Its in their rules.

So, what are their options? Where will they get all of this cash from to magically refinance 300 Billion in option arm resets alone, that is accounting for the fact that 40% are making IO or repayments, so doesnt account for any further jobs market deterioration or other economic shocks?

The bond markets are starting to look increasingly shaky and the appetite for all this state debt I personally think is starting to wane.

I agree, scaremongering is not helpful, but neither is the other alternative, burying your head in the sand and pretending that the credit crunch is about to end. People who think that the global economy is about to spring green shoots need to get a dose of reality. I am not saying it is impossible to make money out there, far from it. But unless you have a good clue about what is happening to global markets and what is about to , how can you make an informed decision?

I'm not burying my head in the sand, please don't think that.

$300,000,000,000 isn't that much when compared with the $3,000,000,000,000 that has been pumped into the banks so far according to The Economist. The bigger problems are going to come IMO when the bill comes in - when the economy starts getting back to something approaching normality and all of a sudden the taxpayers discover how much extra in tax they'll have to pay to cover the interest bill on all that Government largesse and indeed how much longer they'll have to work.

You're right that Governments are starting to find it hard to borrow - the economy looks like it may be 'normalising' in which case who the hell is going to lend 10 year money at 3%? This is going to be the big story for the next few years IMO - recovery being choked off by crowding out.

sabretoothtigger

Generali wrote: »

Banks are paying tiny amounts for their funding right now which means that they can offer very favourable refinancing to problem customers. Indeed you can bet that a condition for the Government helping the banks very generously is that they 'solve the problem'.

The last thing that Governments want is armies of articulate, motivated middle-class people losing their homes and jobs so they will do almost anything to try to stop it happening.

My feeling is that all this is going to end in tears but that doesn't mean that scaremongering is helpful.

If the banks are givng out 30 year fixed rates at 5% and we know rates will rise far above 5% at some point then thats bad news for the banks in the future.

The only way to do arm is to take the house as payment and turn the house 'owners' into renters.
Obamas happy agenda doesnt see homeless people and the banks get about as much money as they ever will in a country where mortgage debt can be walked away from.


I dont see how arm ever made sense

mbga9pgf

sabretoothtigger wrote: »

If the banks are givng out 30 year fixed rates at 5% and we know rates will rise far above 5% at some point then thats bad news for the banks in the future.

The only way to do arm is to take the house as payment and turn the house 'owners' into renters.
Obamas happy agenda doesnt see homeless people and the banks get about as much money as they ever will in a country where mortgage debt can be walked away from.


I dont see how arm ever made sense

Its bad news from the banks now...






http://www.nytimes.com/2009/05/30/business/economy/30charts.html?_r=1&hpw

OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.



The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.
Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking.
The F.D.I.C. has been collecting the figures since 1984.
Virtually the only encouraging news in the report was that the banks’ loan portfolio might be worsening more slowly than it was. While the increase of 3.65 percentage points in a year is the highest ever, the quarterly rise was smaller than in the fourth quarter of last year.
The figures, as shown in the accompanying charts, include loans that are more than 30 days behind in payments, a category that will include some loans that catch up and become current. But the percentage that are at least 90 days overdue, or on which the bank has stopped accruing interest or written off, is also higher than at any time since 1984.

"Virtually the only encouraging news in the report was that the banks’ loan portfolio might be worsening more slowly than it was."

Yeah, wait until the Option ARM and Alt A Default waves strike, its not going to look so great then. All of this can easily be predicted from the graphs in the origianl post. An easing off of defaults followed by a huge spike starting next year and not ending till 2012.

Over all, 8.77 percent of real estate loans are troubled, but some types of such loans are in far worse shape than others. Construction and development loans are in the worst shape, with 17.68 percent of loans troubled, and loans secured by farmland are in the best shape, with only 2.98 percent of such loans reported as having problems.
One area that could get much worse is loans on commercial buildings, including stores and offices. Just 4.01 percent of such loans are troubled, less than half the peak of the early 1990s. A large number of those loans will need to be refinanced in the next few years, however, which could be impossible where real estate values have fallen sharply.

Is the american economy on the precipice of shutting down?

My concern is this; does the global economy have enough cash to pay for all of these bail outs? What is going to happen if people stop buying T-bills and longer term state debt because they start to question the states' ability to pay it back? California, one of the US's largest states is practically bankrupt, with large scale cuts in benefits, public sector workers and other state support. If there is a major bond strike, either global rates are going to have to go through the roof to attract business (possibly bankrupting the US in the process) or potentially defaulting on state debt. More likely in my view, we see further bailouts and the markets take further hits to equity prices as investors start to realise there are no green shoots in sight...

mbga9pgf

Lets not confuse ourselves, governments can printy printy all they like, they simply wont be able to print the cash required without seriously upsetting international bond investors; the underlying forces involved point me to believing initially this is going to be HIGHLY deflationary for asset values followed by spikes in commodity inflation, higher rates and further collapse in asset values. Rock/hard place.

Biflation 2011-2012 here we come!

purch

Tick....Tick....Tick.....Tick.....Tick.....

sabretoothtigger