Option ARM timebomb set to explode....

StevieJ

ad9898 wrote: »

What would be really bad news is if rates were rising just as those resets come in.......oh hang on a min....

If the lenders want a ruck of defaults, of course they will reset them high

ad9898_3

StevieJ wrote: »

If the lenders want a ruck of defaults, of course they will reset them high

Don't see as it can make much difference, after all I've never heard of someone about to be repo'd only to be told by their bank that they will reduce there interest rate for them so they can stay there.

StevieJ

ad9898 wrote: »

Don't see as it can make much difference, after all I've never heard of someone about to be repo'd only to be told by their bank that they will reduce there interest rate for them so they can stay there.

Not talking about reducing, I am talking about not increasing to a punative rate. There will also be write offs of capital by the banks.

System

Thing is with this though, we all know it's coming, so surely banks already know what they're up against here? I can't see where the big panic will come from when they start resetting.

ad9898_3

Joeskeppi wrote: »

Thing is with this though, we all know it's coming, so surely banks already know what they're up against here? I can't see where the big panic will come from when they start resetting.

I think you're giving the dumbasses who earn 6-7 figure salaries far too much credit.

Generali

ad9898 wrote: »

I think you're giving the dumbasses who earn 6-7 figure salaries far too much credit.

Wasn't the start of the problems that the dumbasses on 6-7 figure salaries gave the dumbasses on 4-5 figure salaries too much credit that they couldn't repay?

mbga9pgf

Carnage....

http://www.bloomberg.com/apps/news?pid=20601213&sid=aaPZlSplvu4o

June 11 (Bloomberg) -- Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.
Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.
About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.
Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.
“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”
Option ARM recasts will mean more pain for California, the state with the most foreclosures in the U.S.
$750 Billion Problem
More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Maryland. California accounted for 58 percent of option ARMs, according to a report by T2 Partners LLC, citing data from Amherst Securities and Loan Performance.
Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.
Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.
‘Pick a Pay’
Such terms aren’t typical for option ARMs, which were also known as “pick-a-pay” mortgages. Interest rates on many payment option ARMS are “typically very low in the first one to three months” and can be as little as 2 percent, according to Federal Reserve data.
Breitmaier, who has been in the home for 45 years and lives with her daughter, now fears she will lose the off-white stucco house that’s a hub for her family.
“I wish the government would bail us out like the banks and the car businesses,” she said. “I’d like to go from here to the grave next to my husband.”
Paul Financial LLC originated the loan and it was sold to GMAC, Pannabecker said.
“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” Pannabecker said. “The consumer had a product pushed on them that they had no hope of understanding.”
GMAC is working with Breitmaier and will review all of her options, said Jeannine Bruin, a spokeswoman for the company. Bruin declined to be more specific, citing the firm’s customer confidentiality policy.
Inexpensive Payments
Peter Paul of Paul Financial, based in San Rafael, California, said he wasn’t familiar with Breitmaier’s loan agreement but disagreed with Pannabecker’s characterization.
“The problem is, real estate values went down,” Paul said. Paul said he’s winding down the company and hasn’t made any loans since the fall of 2007.
Option ARMs typically recast after five years and the lower payments can end before that time if the loan balance increases to 110 percent or 125 percent of the original mortgage, according to a Federal Reserve brochure on its Web site.
These home loans were primarily marketed to people with good credit scores, said Dirk van Dijk, director of research at Zacks Investment Research in Chicago. They were also sold to the elderly and immigrants who were lured by inexpensive payments, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, California.
Tough to Refinance
Refinancing is impossible in many states given the nationwide drop in prices. Mortgage rates are also rising. The average 30-year rate jumped to 5.59 percent in the week ended June 11 from 5.29 percent a week earlier, Freddie Mac said today. In California, the median existing single-family home price dropped 37 percent in April to $256,700 from a year earlier, according to the state Association of Realtors.
“Once you start amortizing that loan, the payment is going to shoot up,” said David Watts, a London-based strategist with research firm CreditSights.
The delinquency rate for payment-option ARMs originated in 2006 and bundled into securities is soaring, according to a May 5 report from Deutsche Bank AG. Over the past year, payments 60 days late or more on option ARMs originated in 2006 have almost doubled to 42.44 percent from 23.26 percent, Deutsche Bank said. For 2007 loans, the rate has climbed from 10.1 percent to 35.25 percent.
“We’re already seeing much higher levels of delinquencies of these option ARM loans even before you reach the point of the recast,” said Paul Leonard, the California director of the non- profit Center for Responsible Lending.
The threat of soaring payments has counselors at Housing and Economic Rights Advocates busy.
“There’s a level of hopelessness to the phone calls now,” said Brown.
To contact the reporter on this story: Brian Louis in Chicago at [EMAIL="blouis1@bloomberg.net"]blouis1@bloomberg.net[/EMAIL].

No bailouts, houge default rates and a mortgage product that makes sub-prime lending look perfectly sane.

1) How much of this paper is on UK banks' balance sheets?
2) How big an impact will all these extra defaults have on a US and thus global recovery?
3) Was there any allowance for further overseas asset write-downs in the UK stress tests? I am not sure.

Its all well and good saying that these loans were sold to sensible people with sensible credit ratings, but it doesnt take a brain surgeon to figure the massive increases in repayments is going to be the next source of carnage. Also, it increases the banks losses as (I imagine) the RMBS that originated from option arm would have had a reasonable credit rating in a rising market?

A reasonable but slightly flawed analysis over at seeking alpha...

http://seekingalpha.com/article/142733-the-proof-that-there-are-no-green-shoots

If we do a dispassionate examination of the math we can examine what's coming, and we will discover precisely why those who are calling for an economic recovery are dead flat wrong.
This woman gained an effective $3,500 a month in "purchasing power" by doing something that is extremely dangerous - that "money" came" not from earnings but from a bet "on the come" of a continued price appreciation in her house.
More than one million families did this, and if $3,500 is a reasonable "best guess" at the extra spending capacity per month that was generated, this means that the economy saw:
$3,500 x 1,000,000 = $3,500,000,000 per month in excess spending capacity, or $42 billion dollars annually.
But wait! Its much worse than just removing that spending capacity from the economy, because the interest costs on that recast loan remain, and continue to drag on aggregate demand until the original loan is fully amortized away (30 years!) or defaulted.
That $42 billion is final demand. There is also, of course, all the employment that is unnecessary. $42 billion is roughly 210,000 cars, as just one way of measuring it - that's 210,000 cars that will not be built and the employees to build them that will be unemployed.
Further, there were about $750 billion of these loans originated between 04-08, and almost none of the losses from them have been taken by the banks. These loans are severely underwater and recovery is going to be lucky to reach 50% on them. (These loans, incidentally, are what sunk IndyMac, Downey Federal Savings and others.)
That's another $350 billion in direct losses to the banks and other institutions that has to be taken and which is not being accounted for in the so-called "green shoot" claims, or in bank share price valuations. To quantify this in terms of market developments it is five times the "extra capital" that the banks have raised, five times the TARP funds that are being repaid, and one half the entire original TARP allocation.
These losses are real, they are inevitable, and they are currently being intentionally hidden instead of discussed and dealt with.
These loans are almost all going to blow up, and that will dump another million homes on the market as foreclosure sales, further hammering valuations and inventory levels. This source of existing homes is about 20% of all home sales inventory across a given year - a massive supply increase.
This is why Bernanke and everyone else have been so desperate to restart the housing ATM. It is why they are desperate to stop prices from correcting to sustainable levels, even though the futility of this exercise has now been shown to be fact, not conjecture, as the government and Fed policies have caused long-term interest rates to rise instead of fall.

The above assumes of course the dear old lady had the $3500 a month mortgage payment in the first place. Unfortunately she didnt. Which means when her and the 45% of other poor souls lapse onto a rate of 5%+ with a loan 125% of the original value, the US housing market, and thus the us economy's recovery is F*cked. Truly, truly F*cked.

Anyone else think this Global recovery is being over-egged?

Thats 50% of TARP from ONE problem child... how many other unseen problem children still lie undiscovered?

ad9898_3

< removes head from sand > Look mbga9pgf, it's just not going to happen ok, why ??? erm... well... it just isn't < replaces head firmly back into sand >

sabretoothtigger

On the bright side all this loss in one place is going to mean hopefully alot more slim americans and alot less indians living on less then a dollar a day.
Maybe it'll be a positive in the very end

mbga9pgf

http://online.wsj.com/article/BT-CO-20090710-713165.html

UPDATE: Option-ARM Mortgages Turning Worse Than Subprime

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis.

A further acceleration of troubles among the loans could mean higher-than-expected losses for Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), as well as the Federal Deposit Insurance Corp.'s own insurance fund.

"The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Known as Pick-A-Pays - a brand name popularized by Wachovia Corp. - the mostly adjustable-rate loans were typically issued to creditworthy homeowners, and allowed borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many of the loans, balances have risen while values of the underlying properties have plummeted amid the nationwide housing crisis.

As of April, 36.9% of the loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. (FAF).

By contrast, 33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure.

The loans are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making option-ARM borrowers inordinately vulnerable to declining property values.

Option ARMs account for a much smaller portion of outstanding mortgages than subprime loans, but they occupy substantial tracts of certain banks' balance sheets.

San Francisco-based Wells Fargo holds a mountain of Pick-A-Pays, having acquired $115 billion of the loans in its purchase of teetering Wachovia Corp., which it agreed to buy late last year.

Due to complicated accounting rules, Wells Fargo assigns the loans a value of $93.2 billion, giving it room to absorb future losses on the loans. The bank, however, won't say whether losses from the loans have risen beyond the firm's original expectations.

The firm nonetheless said in May that borrowers accounting for 51% of its outstanding Pick-A-Pay balances made only the minimum payment.

"Our Pick-a-Pay customers have been fairly constant in their utilization of the minimum payment option," Wells Fargo said in a corporate filing.

Wells Fargo declined to comment further.

JPMorgan, for its part, holds $40.2 billion in option ARMs that the bank acquired when it purchased most of Seattle-based Washington Mutual Inc., which collapsed last year.

The New York company also said in a filing that it has some exposure to an additional $46.5 billion in option ARMs sitting in complex off-balance-sheet entities.

JPMorgan declined to comment.

The FDIC could also face future losses due to rising problems with the loans. The regulator agreed to soak up most future losses from about $5 billion in option ARMs once held by Coral Gables, Fla.-based BankUnited, which the FDIC seized and sold to private investors. The FDIC did not respond to a request for comment.

Troubles among option ARMs could well get worse, since the bulk are due to "recast" - industry lingo for reset - over the next three years or even earlier.

Most of the loans reset to a traditional mortgage after five or 10 years, depending on the contract. But borrowers can trigger an earlier recast if the loan's balance exceeds the property's value by a predetermined ratio - usually 110% or 125%.

Whereas subprime delinquencies have started to taper off, option ARMs' worst troubles may yet lie ahead.

"We're just beginning to enter the cycle of resets" on option-ARM loans, says Matt Stadler, chief risk officer of National Asset Direct Inc.

Senior lawmakers are also taking note of the looming storm.

In late June, 20 U.S. senators, including Banking Committee Chairman Christopher Dodd, D-Conn., sent a letter to Treasury Secretary Timothy Geithner to address the issue.

The senators asked Geithner whether he could assure the public that loan servicers are prepared for a "potential onslaught of requests for modifications" from option-ARM borrowers.

No recovery in sight I am afraid.

So anything from those charlatans that assured us prime mortgages wouldn't go pop?