These option ARM's,timebombs

chucky

the_ash_and_the_oak wrote: »

don't know much about these tbh but I thought they weren't due for a couple of years yet?

they've been due June 2008, June 2009 and now June 2010.
still waiting.

the_ash_and_the_oak

chucky wrote: »

they've been due June 2008, June 2009 and now June 2010.
still waiting.

ah ok fair enough, I only really saw one chart - a while back - and it seemed to have these coming through in either 2010 or 2011 i forget which

the_ash_and_the_oak

I know people don't like graphs which is fair enough. I just did a google and this is the one I saw

http://besthomesellingtips.com/option-ARM-resets.JPG

which seems to point to 2010 (and then more so in 2011). No idea how accurate or relevant it is but this is the only option arm thing I've seen before

mbga9pgf

http://ftalphaville.ft.com/blog/2009/10/29/80306/option-armageddon-rears-its-ugly-head/

If our economists are right about the size and timing of the Fed Funds rate hike (approx. 1% per quarter starting in Q2 next year), the impact on borrowers of these types of loans could be very significant. Those who are slightly delinquent or barely holding on could see their payments move substantially higher with the impact possible late next year.”

However, another cause for concern is the number of rising delinquencies on particular mortgage products such as Alt-A loans (particularly those with 5-year teaser rates) and payment-option adjustable-rate mortgages. The concern here is that these products might bring about a second wave of foreclosures, thereby leading to a further decline in home prices.

purch

This 'Blog' caught my eye also,

$134bn of US Option ARM RMBS to recast by 2011, Fitch says

....apparantly recast refers to payment change, whilst reset refers to rate change, and according to the 'blogger', recast is more significant than reset.

http://ftalphaville.ft.com/blog/2009/09/09/70881/134bn-of-us-option-arm-rmbs-to-recast-by-2011-fitch-says/

Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event......Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize. ‘Having not demonstrated their ability to make payments at the full rate, option ARM borrowers are at the greatest risk of default resulting from payment shock,’ said Group Managing Director and U.S. RMBS group head Huxley Somerville.

Negative Amortisation describes a situation that arises whenever a borrower pays less toward the principal on the mortgage than the interest that has accrued over the period. In other words, the outstanding balance on the loan actually increases over time. When coupled with falling house prices and wide-spread negative equity, the outlook for the US option ARM holder is bleak.



Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700



P.S. I like this new graph better than the old one :T

mbga9pgf

Has it started?


http://www.upi.com/Real-Estate/2009/11/09/Tidal-Wave-of-New-Defaults-Begins/5041257789111/

Now recasts are starting to come due for the first wave of option ARMs and there is some evidence the first wave of defaults is ahead of schedule. In a highly publicized report last September, Fitch Ratings predicted roughly $29 billion worth of loans would recast to higher monthly payments by the end of 2009 and an additional $67 billion would recast in 2010 and would not abate until 2012. Borrowers will find themselves paying an additional $1,053 on average each month. Fitch also found that many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. In July, about 40 percent of borrowers with option ARMs were already delinquent, and "many" of the others will start missing payments before their obligations change, according to analysts at Barclays.

Fitch also found that many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from [COLOR=blue! important][COLOR=blue! important]refinancing[/COLOR][/COLOR]. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk.

StevieJ

I am sure the last thing the banks will want to do is repossess property, compromise must be a serious option.

mbga9pgf

They dont have a choice. They either hike mortgage rates, starting repayment of the debt, or they allow the debt to grow, or they reposess.

Remember, US is non-recourse. Is an owner, in crippling debt going to stic with a house that is worth now 50% of its outstanding debt, or are they going to hand the keys in?

the_ash_and_the_oak

mbga9pgf wrote: »

They dont have a choice. They either hike mortgage rates, starting repayment of the debt, or they allow the debt to grow, or they reposess.

Remember, US is non-recourse. Is an owner, in crippling debt going to stic with a house that is worth now 50% of its outstanding debt, or are they going to hand the keys in?

think only around half US states are non-recourse imo - tho that includes some of the worst affected states - Arizona Nevada California but pretty sure not Florida

ManAtHome

Yep, Florida can chase you for the cash - non-recourse states listed below - some allow pursuit if the lenders pay big bucks, so depends on the size of the loan and whether the mortgagee has any assets.

They are currently in 'the lull' - the graph has been posted on MSE several times and laughed off by the odd one or two (it's only them USians ending up on the streets after all) - perhaps we can donate a few 'smileys' and/or just pretend it's not happening to ease the pain..?

Not good news and graph link http://www.economicpopulist.org/content/option-arm-mortgage-resets-tidal-wave-about-hit

Non-recourse States:
Alaska
Arizona
Arkansas
California
Colorado
District of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana
Nevada
New Hampshire
Oregon
Tennessee
Texas
Virginia
Washington
West Virginia
Michigan
Minnesota
North Carolina
Rhode Island
South Dakota
Utah
Wyoming