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Thanks CR - good timing.
first
CR-i've relied alot on this chart for my forecasting this coming yr. In the back of my mind however i'm wondering if there is any data indicating if and how this chart has changed due to refinancing. any thoughts?
Note that BoA's estimate of rate resets in 08 is well above Ivy's, well above UBS', well above Lehman's, etc.
I doubt the chart has changed materially from refinancing. If anything more borrowers are going to be in trouble due to falling house prices impacting appraisals.
That is the next shoe to drop- so many borrowers unable to refinance at all due to underwater debt.
That Jumbo spike in '09 would probably begin to be the bottom as the REO inventory is finally priced to move, rather than sit vacant.
Someday this war's gonna end...
Another interesting couple of points come from looking at the comments on the OC Register blog. While the points above about differences in the totals are good the #'s are all roughly consistent. Most of the comments - in the heart of the catastrophe- deny the problem exists because of equity improvements in SoCal. Come again ?
When will the FDIC guys get busy?
Allen
that BofA chart IS more terrifying than Ivy's. that huge spike in Mar 08 exceeds Ivy's projection by almost 4x dollar volume! i had originally thought the worst was in Dec07
idoc, I'm sure the chart has changed some - there was a fair amount of refi activity in June and July - but this is the most current chart that I'm aware of.
As Tanta noted, many borrowers are out of options and can no longer refi. So this chart is probably pretty good and shows that the major problem will hit in the first half of '08. But it still takes time for people to give up - and even more time for the NOD, NOT, REO cycle. So I suspect the pain will be felt all through '08.
Best to all.
Q1 '08 is going to be fugly.
Tom-
From what I've read, BoA's charts are the only ones showing the entire field.
From the Credit Suisse report that contains the referenced chart:
As shown in Exhibit 42, roughly $300 billion of securitized subprime mortgages (36% of outstanding subprime MBS) are set to reset in 2007 alone, with even more occurring in the non-securitized space. This, in our opinion, is the next shoe to fall and will likely contribute to additional delinquencies, foreclosures, inventory and additional pricing pressure.
While I doubt the overall percentages of default and foreclosure rates have changed much from their analysis, they are still only talking about 36% of the total money involved.
So I suspect the pain will be felt all through '08.
And an election year too - not what the pols of either party want to see.
CR - you or T see any way they can push this out to '09? My guess is they are going to try like crazy to do it.
I've seen UBS' estimates, which attempt to estimate the whole subprime space, and BoA's in early 2008 is way above the UBS estimate. I think they are mistaken.
Here is a direct link to the earlier reset chart from Ivy Zelman's group at Credit Suisse (extracted from the entire PDF file that CR linked):
| here
Lacoursiere's BoA report shows simply enormous amounts of ARM resets during the first quarter of 2008. It has total ARM resets peaking at over $100 billion / month in Mar 08, while the Zelman CS report has total ARM resets peaking at "only" $50 billion / month at the end of this year. I wonder why the predictions are so different.
The CS graphic breaks out non-securitized ARMs as a separate category, while the BoA graphic reports on the total of securitized and non-securitized loans. The BoA graphic is interesting because it breaks out Jumbo loans, which are probably grouped with Alt-A in the CS graphic. But BoA does not show non-agency prime ARMs (perhaps agency and non-agency prime are grouped together and labeled as agency loans). Only the CS report breaks out option ARMs as a separate category. I suppose the option Arms could be subprime, Alt-A or prime. On the graph, option ARM resets don't become important for another 2 1/2 years, but I wonder if this represents the worst case (paying the lowest possible payments would cause house-owners to hit the triggers earlier).
For what it's worth, a Bloomberg article prompted by the BoA report said that "LaCoursiere is the top-rated mortgage-industry analyst based on investment return from his recommendations, according to StarMine Corp." He has been at BoA since 2004. Before that he covered regional U.S. banks and, even earlier, Latin American finance.
.
The Latin American finance experience should come in handy for analyzing the US economy over the next few years.
Here are UBS' estimates of subprime resets by month for $609B of subprime securities outstanding.
\t$B
Aug-07\t18.84
Sep-07\t22.85
Oct-07\t23.28
Nov-07\t20.63
Dec-07\t20.91
Jan-08\t21.52
Feb-08\t17.38
Mar-08\t18.82
Apr-08\t25.25
May-08\t22.61
Jun-08\t24.01
Jul-08\t26.57
Aug-08\t24.52
Sep-08\t27.48
Oct-08\t23.65
Even if you "gross these up" to reflect the whole subprime market, you can't get BoA's numbers.
"So I suspect the pain will be felt all through '08." [CR]
"And an election year too - not what the pols of either party want to see. CR - you or T see any way they can push this out to '09? My guess is they are going to try like crazy to do it." [dryfly]
That will be hard to do, given that the Dems control Congress, while the Republicans control the White House. Also, my sense is that the Bush Administration is preoccupied with Iraq...
It is going to be a somber '08 Holiday Season....
An ARM reset is not necessarily a bad thing for a mortgage payer -- that is, if interest rates drop, then some ARM resets will lead to lower payments.
What is interesting for predicting problems are the initial resets on mortgages with low teaser rates.
Can someone explain how these ARM reset tables are related to these dangerous first-time resets from teaser rates?
It would also be interesting to see some predictions about option ARM mortgages. I believe many such mortgage holders make minimal payments which do not cover the interest. This interest is added to the principal, but these mortgagees will eventually run into a valuation limits. At this trigger point, the mortgagees would have to begin making larger payments. This payment shock would be similar to the shock due to a reset from a teaser rates. Has anyone seen any predictions for the option ARM trigger calendar?
.
Not sure how they could delay the pain until after the election. Things get really ugly in March, so they'd have to stall for seven months to push the implosion until after November. If they come up with a scam that manages to do that, the side-effects of something on that scale would probably wreak havoc on the rest of the economy.
Let's look back so we can see where things are headed.
Here's a chart (scroll down) of commonly used ARM indices.
Mortgage Indexes: CMT, Treasury Bill, MTA, COSI, COFI, LIBOR, CODI, CD, Prime Rate
Now, March 2008 is when the dollar-amount peak of ARM resets will hit.
So anyone with a 1-year ARM originated in March, 2007 would see virtually no change in their rate unless rates rise from here (when there are loud calls from numerous players for the Fed to ease). If the Fed does ease these homeowners might actually see a slight downward adjustment in their rates next year.
Homeowners with 2-year ARMs originated in March, 2006 will see only slight increases unless rates rise from here (when there are loud calls from numerous players for the Fed to ease). Once again, if the Fed eases, they, too, would see virtually no change (and possibly even a downward adjustment) in their rates.
Obviously any homeowners who have low initial teaser rates would face resets at higher rates, but they're a subset of homeowners with ARMs.
I know it's sad to hear, but I don't think things are going to be as ugly as the bears hope.
Sebastia
dryfly, I think both parties are looking to push it out to '09. That's what they did with the S&L crisis in '89. Probably won't work that way this time - that's a mighty mountain of ARM resets in H1 08.
Have a look at this chronology:
About.com: http://www.fdic.gov/bank/historical/s&l/
My favorite excerpt:
November, 1988--George Bush elected President. S&L problem not part of election debate.
1989--President Bush unveils S&L bailout plan in February.
Just to be clear, the S&L bust had fingerprints from both parties, just as does this one. Rubinomics anyone?
Gosh, I really wonder about that tiny sliver of Alt A resets. There's are boat loads of neg am trigger points out there, when they revert to regular amortizations. I've seen little good work on that one.
Sebastian
I dont know how reliable your comments can be.
How many ARMS are set to Libor?
What proportion of sub prime borrowers had a loan on only a one year reset schedule? how likely is that as a typical loan? I would have thought quite uncommon?
Data must be out there.
What exactly is the pain going to be like in march 08. Somebody must know that surely?
Worried said: "I don't know how reliable your comments can be."
Again, for the umpteenth-umpteenth time, it's not about my comments or opinions. It's about what the data says. Interest rates have been going sideways for a year now, and there's excellent reason to think they're going lower soon.
"...How many ARMS are set to Libor?"
Look at the indices on the chart. If you do you'll see that 6-month LIBOR is one of the indices listed...and it's lower than it was a year ago.
S.
How much of this amount is interest only or neg-am ARMs?
Sebastian as usual sees only the sunny side of the street. If it ain't sunny, he's always got a flashlight.
Housing is collapsing in any case; the ARM resets are not the straw that will break the camels back, but another brick thrown on the collapsed structure of the USS Housing market.
I know this is not a MMI thread, but I hope that will be waived for this entry.
The data, Seb?
The data doesn't talk. This is about what you see in the data, and I say the data has been kicking in your slats for about 6 months now and it will get a lot worse before it gets better.
So anyone with a 1-year ARM originated in March, 2007 would see virtually no change in their rate unless rates rise from here (when there are loud calls from numerous players for the Fed to ease). If the Fed does ease these homeowners might actually see a slight downward adjustment in their rates next year.
It depends on how many of those sub-prime ARMs are on teaser rates. I dont have numbers in front of me, but I remember it being a significant portion.
Sebastian,
I've been reading a lot of the Notes from foreclosures on my local county website and there are a couple of things that you should know:
1) The initial interest rate is not calculated from the index (LIBOR or whatever) - it's typically much lower than what would be calculated from the index+margin (margins range from about 2 to over 7%). So the initial interest rate might be say 4-5%.
2)The rate is typically not allowed to go below the initial rate so even if the index goes down your payment would not go down.
3) The rate increase is usually limited to 1-2% (but not always, some Notes go from the teaser rate to index+7% - ouch!). If the index+margin is say 11% and you started at 5%, it would take 3 resets (say 18 months) to get there.
The bottom line is that a monthly payment can easily go up 50% at the first reset and double within 18 months.
OK, about the difference between the BOA chart and the CS chart.
The CS chart takes a universe of outstanding ARM loans as of January 2007, and calculates a number of months until the first adjustment for each loan.
The BOA chart takes a universe of outstanding ARM loans as of March 2007, and breaks out the dollar amount per month of adjustment.
All ARMs adjust more than once. For a 2/28 ARM, the first adjustment comes after 24 months. Each subsequent adjustment comes after six months. Therefore, in the BOA chart, which has a period of three years, the same ARM can show up many times: first adjustment January 07, second adjustment July 07, third adjustment January 08, fourth adjustment July 08, etc.
If you assume that the loans do not refinance, and you want to make a chart like BOA's, then your reset $ becomes "cumulative."
The CS chart, as far as I can tell, does not have the cumulative problem because it looks at months to first adjustment and ignores what happens thereafter.
I should add that the adjustment stops on the loan once it hits the lifetime cap on the rate.
Presumably the BOA chart only runs these adjustments out to the point where the loan hits its maximum lifetime rate.
Your typical 2/28 ARM has caps of 2/1/6. That means the rate goes up a maximum of 2 points at the first adjustment, 1 point at any six-month adjustment, and no more than 6 points total over the life of the loan. So, worst case, it takes four years to get to the maximum rate on these loans: up 2% after the first two years, and up 1% for four six-month intervals thereafter.
Lagarita said: "The bottom line is that a monthly payment can easily go up 50% at the first reset and double within 18 months."
If Tanta signs-off on what you said and it applies to generally to all ARMs, I'll accept it. Otherwise...
S.
I just did a refresher post recently on ARM calculations.
Calculated Risk: Lookback-ward, Angel
It is not possible to make generalizations about "all ARMs." You must know the index, the margin, the cap structure, the months to first adjustment, the frequency of subsequent adjustments, and the origination date.
BOA estimates that subprime 2/28 ARMs resetting in 2007 will have an average payment increase of $500.
All of the graphics (the "exhibits") of the Credit Suisse / Ivy Zelman report "Mortgage Liquidity du Jour:
Underestimated No More" are available online as GIF images, here:
| real estate charts - reports
I suspect that bloggers and others who want to show one of these graphics can link to it with the URL used in that page.
Now if I could only find the BofA report online somewhere -- I believe it is entitled "Just the tip of the iceberg. Mortgage Credit Deterioration."
Tanta, thanks for the explanation about the differences between the two reset tables!
.
--
What if pre-sets, meaning "Walk Away"!, obviate the need for resets?
Things will happen so fast the people who facilitated the problem, USG and the Fed, wouldn't be able to do anything meaningful. Wouldn't that be something?
We are living thru a remarkable history-making epoch in the US and the world history, folks.
Jas
I think Seb is right about rates going down
My concern is that many of these subprime and Alt-A loans had teaser rates or negative amortazation. It is the rate shock associated with having to fully amortarize the loan that is the problem.
A reminder: Tanta already posted some very interesting graphics showing predicted 2007 ARM resets (from a Fannie Mae report) here:
| Calculated Risk: Fannie Mae on 2007 ARM Resets
The WSJ also showed a little graph of predicted resets "to higher interest rates" using data from Deutsche Bank Securities, here:
| http://online.wsj.com/public/resources/images/P1-AI738_MARIO_20070815182439.gif
.
Tanta,
The BofA data doesn't seem right to me. The percentage of subprime to the total seems way out of whack. It appears that 70-80% of all upcoming resets are subprime.
This data doesn't seem to square with the volumes and percentages published by Credit Suisse in March either.
Can you provide some insight?
Thanks,
Tanta:
Since this chart appears to just be looking at ARMs, does that mean that it does not include I/O recasts once the I/O period ends? If the I/O loans are included, then I assume that they are lumped into their respective category (jumbo, Alt-A, etc.).
Just curious since so many people here in So Cal have used I/O over the past few years.
Sebastian
I admit I don't understand all the intricacies of the mortgage business, being an idiot renter, who looks at housing as a Value Investor would (computing net discounted cashflows for the lifetime of the property and comparing that to the current price of the house).
But have you considered that the fed could cut the fed funds rate and yet
a) have no impact on long rates ? In fact if a cut in the fed funds rate stokes inflationary pressures (flight to commodities), then long rates may actually go up ?
b) spreads between risky debt and treasuries could actually widen regardless of what the fed does ? Since 2003, the US did a fine job passing crappy paper with AAA stamps to foreign investors. Do you think foreigners would fall for a different, new Con so quickly ? Or would you expect that we can Con them only after the bittern memories of the subprime fiasco is washed out of their memories ?
You can interpret the data any way you want it, but nothing you say changes the fact that we are at the start of a downturn that is going to last 5 more years at least, more likely a full decade from here.
Of course, Fannie and Freddie could buy up every home loan made from here onto eternity, try to sell them off with an "implicit government guarantee". If that fails, they can always stick that to the taxpayer. Short of the Govt mailing checks to every FB, I just don't see how you can wriggle out of this one anytime soon.
Peconic Bay, please see my comment at 2:56 pm.
Waiting, the trouble with IO is that some ARMs have an IO period equal to the initial fixed period (so, say, a 5/1 ARM is IO for the first five years) and some have a 10-year IO period regardless of the initial fixed rate period. The former will have the most painful adjustments (the rate will go up at the same time that the payment is recast to amortize). The latter will have a more gradual effect (because there will be several rate increases before the recast occurs).
We got out of the real estate market in May of 2006, and at that time we had known about the refi time bomb for 18 months. When I saw the chart by Ivy Zelman last March I was certain we were headed for a real estate depression.
When Bush hits Iran we will know what a real estate nightmare is. The nightmares and panic that goes with a depression will soon be our reality.
They make their own reality, and we are forced to live it.
"So I suspect the pain will be felt all through '08.
And an election year too - not what the pols of either party want to see."
Not the big boys, Democrats no more than Republicans. But it could "I told you so" time for guys like Dennis Kucinich (on one side) or Ron Paul (on the other).
Regardless of whether our Fed eases or not - LIBOR appears to have an upward bias as of late, doesn't it? Is there any direct correlation between our fed funds target rate and LIBOR?
CR/Tanta,
Any way to plug in the average start rate by month? Would help to look back at those that have already reset to see how they performed.
I seem to remember start rates starting to climb in late 2006 and early 2007 until the wheels came off. I wonder how a higher start rate would impact the 36%? In other words, could there be more borrowers who might qualify for a GSE refi (EA or FHA)? Conversely, if there was a significant change in average start rate by month, when they do adjust it could be much worse than we think.
dryfly, I think both parties are looking to push it out to '09. That's what they did with the S&L crisis in '89.
Ya I agree - I was there for the S&L mess out in fly over. Everyone out here saw it happening and not a peep from either party in the election. '08 will probably be 'the same only different'.
Tanta,Lifetime caps on 5/1 jumbo arms hit 18% in march of this year for prime jumbo's.I have seen 21% lifetime caps originated in june and july this year for prime jumbo arms.
Tom, that's incredible to me.
I have never seen a true prime jumbo 5/1 with a life cap of greater than 6.00% over the start rate. The loans you are talking about have to be essentially uncapped--i.e., they're just hitting the usury limit.
In any case, if the loan had first and per-adjustment caps, it would take a while for it to hit that lifetime interest rate--at least seven to ten years, I would think. I don't see the point of worrying about projecting resets out to 2014-2017.
ba_lurker said: "I admit I don't understand all the intricacies of the mortgage business, being an idiot renter, who looks at housing as a Value Investor would (computing net discounted cashflows for the lifetime of the property and comparing that to the current price of the house)...."
There's your first mistake.
If you look at it from the standpoint of having a wife who wants a house, things start to look very different, LOL!
Seriously, a house is a terrible investment the way you describe it, no question. But somebody who wants one will leave no rationalization unturned to get one if they can make the payments, and ROI be damned.
ba_lurker also said: "You can interpret the data any way you want it, but nothing you say changes the fact that we are at the start of a downturn that is going to last 5 more years at least, more likely a full decade from here."
Speaking of interpreting data any way I want, what objective data with proven forecasting ability did you use to make this statement?
CR used housing construction data, very well-presented with charts and all, to forecast 400k-600k in residential construction job losses by this summer. He also used it to make the case for a good chance of recession...also by this summer.
No joy on either call yet, and the durable goods and manufacturing data suggest that the economy is actually improving.
I don't have all the answers, but I can get a lot closer by looking at all the data, not just the part that fits any preconceived notions I have.
Sebastia
The focus on the resets has generally been subprime and ALT A resets.... I would caution loking at the resets for jumbo and agency loans which generally pick up during the spring of 08 and will gather steam through the end of 09. Since subprime and Alt A are gone or rapidly eroding as viable mortgage products , we should focus on this area of resets for their potential impact. I think accelerating job losses as we move into what could be a sever recession may make jumbo and agency loan resets more significant than the gross numbers might indicate at the onset. A great credit risk becomes a riskier credit risk if the individual is unemployed or underemployed.
I agree these houses will probably forclose before then.
So between 2007 and 2008 there will be approx one TRILLION (1,000,000,000) dollars of loans resetting. 2006 showed that approx 75% of deliquent loans were able to pay back their loans. Of the loans that reset, approx 20-30% defaulted. The stats for 2007 already look to have a much higher default rate.
However, if the average loan is 300,000 dollars, that means that only 3,300 homes will be affected - not to much for all of the USA.
I am kind of amazed that there are so many more subprime resets than alt-a resets. On the chart. Were there not almost as many alt-a loans written in recent years as subprime, and were not many of them adjustable in some way?
Perhaps are they not in the chart because they are option arms with ltv-based recasts and not fixed reset dates?
This just doesn't fit in with what I've heard and observed about the volume of alt a loans subject to reset/recast.
rt, I thought the same thing at first.
But I think it's a distortion due to the fact that these are cumulative resets (see Tanta at 2:56).
The margin on a subprime is so much higher than on an alt-a, that you end up resetting the same loans over and over.
Alt-A is more of a once-and-done, assuming that you have a moderate interest rate increase.
Thanks Pablo (and Tanta)... makes sense.
Now that I thought about it, though: I wonder if anyone has thoughts on the idea that pay-option ARMs, which as I understand it have a recast based on reaching a certain LTV rather than a specific date, are represented in these charts.
Thanks all... great stuff as usual.
What?
If we remember the volume of RE slaes in 2005 and 2006, the BOA estimate of ARM resets fits the sales curve perfectly. The RE industry was urging people to buy while the rates are so low. I recall many buyers bragging about only have to pay $400/mon for a $300K new house, with zero down. The housing bubble craze spiked in Spring of 2006. Even if we take only 2/3 of the dollar values of the BOA estimate, it is easy to see the magnitude of future impacts in comparison with the impacts we currently see (from the Spring 2007 resets). The Dec.07 retail will show some of the impacts at home. We might have a very sad Christmas followed by a worse New Year.