Bob, yes. Option ARMs were intended as a cash management tool - but I think most borrowers used them as affordability products - and they stretched into homes they couldn't afford.
I suspect many of these homeowners will be in trouble - and they won't be able to refinance because they will discover they owe more than their homes are worth.
12th Percentile, those charts showing the resets coming in '09 and '10 didn't factor in people getting to the 15% max neg-am so quickly. Basically a large percentage of Option ARM borrowers have been using the neg-am option - so the problems will hit quicker.
If you have nothing to contribute except a witty comment, please reconsider posting here. If you've found a link to useful information, share it with the rest of us so we can all learn more.
It's your second guess. These folks still face their first interest rate adjustment in 09-10
The overwhelming majority of OA borrowers faced their first interest rate reset one to three months after closing. That's why they're negatively amortizing.
Certainly there were some "hybrid OAs" out there that had a fixed interest rate for 3-5 years. However, if the minimum payment was set low enough (like 30% of the amortizing payment), then those can easily recast (hit balance cap) before they reset (change interest rate).
Not every OA has a 115% cap. Some have 110% caps. By my calculations, an OA originated in January of 2004 with an MTA index could easily have hit a 110% cap last month.
Correct me if I'm wrong on my thinking. Option ARM holders have essentially these options:
Lowest payment (less than interest only)
Low payment (interest only)
Mid payment (interest and some principal)
High payment (interest + principal)
So, to hit your max 15% limit quickest, you have to pick #1 every time (assuming these loans were originated at the same date -- I know they weren't, but just to keep this simple)
We can assume a large percentage of those picking #1 every time did so because that's all they could afford.
So, we should see the weakest borrowers blow up first -- the problem is front-loaded.
Put another way, suppose only 5% of Option ARM holders will blow up over the life of all the loans. But those 5% are going to hit us early -- they won't be evenly spread out over time. Thus, the problem will hit us with more of a shock effect.
I'd rather be anywhere else than here today.........
Long Live the Other Elvis!
Oh. This NegAm blow-up information is quite interesting. From Tanta's discussion of it a few weeks back I did not think the loans would blow until 2009-10 because, as I thought I understood it, the OA loans came with caps on the amount they could NegAm each year . . . But 1) I guess a January 2004 loan with a 110% trigger and 2.5% annual NegAm cap could well hit the trigger point now, and 2) when in doubt I think I should assume that Tanta's explanation was probably right and I might have misunderstood part of it.
MTHood, so long as the environment remains constant you might get the weakest all front loaded but I'd imagine there are some knock-on effects that necessarily come into play. Just cause MI showed large numbers of foreclosures first doesn't mean CA isn't the bigger problem.
Not only do these payments reset at with full amortization, most of these loans had a silent second.
The 1st TD has now balooned from 80% to 90-95% based on accrued and compound interest. The second is still at 20% with negative equity if property values did not decrease.
In all liklihood the property taxes have not been paid. And prices are off 10-25%.
These loans were ALT- A no qualifiers. First Fed made a ton of these in Sacramento area on new homes to speculators.
No PMI on these loans. And First Fed kept the majority on their books and did not repackage.
Managment has used Wall Street to prop up its stock. They had bank analyst recommending it as buy.Then bought back $50 million worth of stock when the stock was much higher.
The buyback makes EPS higher since fewer shares outstanding. But now they need the capital and could have even bought back more shares at a lower price.
The ALLL reserve is decieving because the balance sheet has shrunk dramatically.
First Fed business model was based on World Savings. Only World Savings sold out at the top of the market to Wachovia.
Lower Interest rates and refinancing will not help First Fed borrowers. These properties will go back. The silent seconds will be wiped clean. FirstFed will eat the rest and get the property back and the losses will be very significant.
The worst part is that they took the accrued income in when it was being negatively amortized. Now they day of reckoning is here they will have to go to the confessional stating that interest was never earned.
I guess they won't be earning any prepayment penalties either.
The trouble is that "OA" is not really a homogeneous population of loans.
There are many, many variations in index, margins, balance cap, and rate adjustment frequency, plus the issue of LTV at origination and quality of appraisal.
Add to that the very basic difficulty in projecting these things: you have to keep updating your projections not just with actual borrower behavior (amount of neg am) but index movement. At the rate the Federal Reserve is going, we'll be giving at least some of these loans another few months at least (the ones with a monthly rate adjustment, anyway).
But even the ones that are a year or two away from recast are still (unless they're hybrids) experiencing annual payment increases (usually 7.5% a year). Some of them won't make it to reset just because they can't withstand the "normal" increases.
"This time, the losses are hitting players of a strategy known as price momentum, which bets winning stocks will continue rising and losing stocks will keep falling. On Wednesday, these strategies experienced their fourth-biggest loss since July 1950, according to a research note from Matthew Rothman, head of Quantitative Equity Strategies at Lehman Brothers."
Option ARMs were intended as a cash management tool - but I think most borrowers used them as affordability products - and they stretched into homes they couldn't afford.
Because that's the way these loans were marketed by the REIC.
Take a product that was originally intended for wealthy stockbrokers and executives that receive most of their compensation in the form of year-end or quarterly bonuses and mass market it to strawberry pickers, Wall Mart greeters & unemployed 24-year-old sociopaths. What could go wrong?
Correct me if I'm wrong but before recently, these were very rare loans suitable to specific types of incomes that are uncommon.
It seems to me that, regardless of reset times, the vast majority of these that still exist will result in either a refinance (i.e. the loan gets paid) or reset. And, refinancing out of them is getting impossible without bringing cash to the table).
To have an idea of how many will have problems, a company just has to count them. If it's out there, it's gonna default.
All First Fed has to do is take an inventory of it's outstanding OP ARMS, write off all presumed income from unpaid interest, presume the cost of default or resale (60-70%) and go from there. I'm guessing that so few will be able to make FirstFed whole it's insignificant.
This time, the losses are hitting players of a strategy known as price momentum, which bets winning stocks will continue rising and losing stocks will keep falling
At least they used the term "bets".
How boring is your job if you are employed in price momentum firm? Duh...stock go that way...I follow...
"The problem with some of these strategies is that they're developed "looking in a rear-view mirror," which is helpful when markets are calm but not when things start to behave differently than they have in the past, said Bill Crerend, who runs a $4 billion fund of hedge funds for Bank of New York Mellon Corp."
Hmmm. Haven't these people ever heard the phrase, "Past performance is no guarantee of future results?" It's on every prospectus I ever looked at, along with (my personal favorite) "This page intentionally left blank."
for any of u guys interested, it looks to me like the HB's are getting ready to roll over from overbought territory. several formed a spinning top today, i.e., big jump at the open with large fade throughout day. will be interesting going into FOMC mtg. just talkin my book but do keep an eye out.
Very OT - Unirealist - Response to message in an earlier thread. I am a registered Republican - not a Republican. Same reason I was a registered Democrat for a long time. In Florida - most counties are predominantly one party or the other. And if you aren't registered in the dominant party - you can't vote in the primaries that matter (we have closed primaries). We now have a law in Florida that tries to deal with that problem. If there is no candidate running from the other party for a particular office (which happens a lot) - everyone can vote in a primary. But what happens sometimes is the dominant party gets some ridiculous candidate to run in the general election from the other party to deprive people from the other party and independents from voting in the primary. In general elections - I'd say I vote for Repubicans about 40% of the time - for Democrats about 40% of the time - and about 20% of the time the candidates are both so disgusting I don't vote at all.
Any other Florida people out there? How many robocalls did you get today? I got 6 from Romney before noon. One from McCain in the afternoon on my answering machine. None from the other candidates. For those of you not in Florida - our primary is on Tuesday. Probably the first real "party" primary. Where people vote - instead of caucus. And where independents can't vote. Democrats can vote - but because of some obscure party rules I haven't paid much attention to - their votes don't count. If I were a Democrat - I'd be really pi****. There are fewer people in Iowa and New Hampshire combined than in the metro Miami area.
Note that I am voting for McCain on Tuesday. I disagree with him on some very important issues - like Iraq and abortion. But at least the guy has principles - and he isn't changing his mind all over the place - or pandering to us. Giuliani's newest pitch is having a national hurricane catastrophe fund which will bail us out if there's a bad storm (him too - he owns a waterfront house in Florida). Terrible idea IMO. And I'm sure you guys in California - who have enough problems with earthquake insurance - wouldn't be kindly disposed to such a bailout fund.
BTW - I still haven't heard a peep from AARP about the fiscal stimulus plan. OTOH - I think only one paper I read today - the NYT - mentioned that people who aren't working - including retired people - won't be getting any money back. Roby
We can assume a large percentage of those picking #1 [lowest payment] every time did so because that's all they could afford.
I think for many people it wasn't 100% an issue of "could afford", but was best for their cash flow. In particular for flippers carrying cost becomes a huge issue, so the lowest payment is perfect (in effect they get to finance their carrying cost). So I'd group resets roughly into 3 categories:
1) people who could afford an amortizing payment but chose not to for lifestyle reasons (Real Housewives of OC)
2) people who chose a non-amortizing payment for cashflow reasons (Flip That House)
3) people who chose a non-amortizing payment because it was all they could afford (NINJA/subprime/...)
For #1 the end game will largely be sale or refinance and cut back on lifestyle. For #2 the end game will probably be sale or short sale (or jingle mail, resulting in "pier mortgages"?) For #3 the end game will almost certainly be short sale or foreclosure, since there's unlikely to be a buyer who can pay what they did (even if they wanted to they couldn't get the loan).
I don't have any data on where in these three groups most borrowers lie, but my intuition is that 1 and 2 are larger than 3.
I'll back up what Mike Morgan says. The moron builders are still building like crazy in areas here in SW Fl. And yes,there are buildings that for free would still cause you horrible liabilities/inability to get rid of.
Prior threads have been thoroughly junked up with off-topic ramblings and troll-baiting.
YOU MAY NOT CONTINUE ON IN THE NEXT THREAD.
Come on, folks. I've already abandoned the last four threads because of this. Can't you all leave ONE THREAD for those of us who want to talk about the topic?
FOR THE REST OF YOU: THIS POST IS NOT AN INVITATION TO BAIT ROBYN OR ARGUE ABOUT ARGUING ABOUT ARGUING ABOUT OFF-TOPIC POSTS. GO TO EARLIER THREADS TO DO THAT. NOT THIS ONE. I MEAN IT.
What I simply can't understand is how they can get away with setting reserves at any number they choose. They seem to decide based on their portfolio size and some bond insurer formula about losses in 2005 rather than real world data like actual defaults and trends along with anticipated recovery, based on their own experience.
Why do we have regulators? Is it the OCC or FDIC that needs to buy off on their fairy tale financial reporting.
These guys are running cash flow negative. One day they will go from profits of $61MM straight into receivership and common from $35 to ZERO, overnight. There is no way these chumps get saved by anything Paulson can cobble together. It's a charade.
A more immediate fear I would think is that they will owe more and more on a property that is worth less and less. So if they have any sense at all -- doubtful in many cases perhaps -- they will walk away.
For the HBs to prosper they have to build and sell homes. I don't see the markets (securitization), including the GSEs, absorbing enough new mortgage debt to enable HBs to make money like they did before. Times have changed.
ac [I think the industry could end up looking like the airline industry in the past: "too important to go under".]
c'mon. There's an argument to be made for keeping airlines afloat for a while. Airlines are an asset that have national financial interests at their core. Airports, businesses for travel... all sorts of very defensible arguments. Homebuilders, not so much. We can have 1/5 of the national builders left and no one would notice. After all, there are plenty of private builders that could come along to satisfy demand.
I believe the basic story with the option ARM is the intention to flip and make a profit before time ran out. Of course, not counting on the bubble to pop.
I'm not saying that this type of statement is to stupid to come out of our political leaders mouths but this isn't like the airlines. Lots of small contractors are out there willing to build homes. HB does not require the massive amounts of captial of the airline industry. As an added benefit we might get neighborhoods with some diversity and character.
i know a RE broker who i bought a condo from 5 y ago who had loaded up on about a dozen condos up and down Calif with specifically negam loans. strongly recomm. i do same with my condo but didn't listen and did 30y fixed. when i called him last Spring he said he was fine and would just stick it out. i should give him a call...
CR - I do think you could have added some levity by adding a background sound bite - Jingle Bells perhaps?
The bright side is that these folks can draw the equity in the form of "payments" (thats two years of free rent) and the property goes REO (thats another year of free rent). So my big question is: Who is the most financial savy in this equasion?
Propping up homebuilders when we have a year of inventory in the system? someone should check into how much they are sending to the politicians if this is the case.
if the planes don't fly, we've got problems RIGHT NOW and all businesses suffer. If no homes get built starting tomorrow, we've got no problems for at least a year, probably two.
About Large public HBs - We will see more than 1 go Ch11 and common to zero this year. They all scaled their businesses with debtloads to satisfy 2005 level demand. Their lenders will finally say "no mas" and force the issue. I wouldn't be surprised to see 25% de-listed this year. They may emerge leaner and then force the others into BK as they will be scaled to survive on the scraps that remain of demand.
HBs shouldn't be propped up but I think the issue of half-finished developments is non-trivial. If big players start falling, states and localities need to pay close attention to whom various promises to complete infrastructure falls, along with deposits, bonds, etc.
From an underwriting perspective what are the norms for deliquincies. Seeing a number like "+231%" is alarming. But I have no base from which to judge. Numbers only mean something if they are put into context and to understand trends a historical context is warrented. Now, I understand not all loan products are equal nor might they yeild similiar expectations. However, if the objective is to understand the economic meaning, context would be nice. Has there been discussion in any uber posts on this matter?
"i know a RE broker who i bought a condo from 5 y ago who had loaded up on about a dozen condos up and down Calif with specifically negam loans. strongly recomm. i do same with my condo but didn't listen and did 30y fixed. when i called him last Spring he said he was fine and would just stick it out. i should give him a call..."
In my corner of California, a good percentage of the high-end homes being offered for sale seem to be from brokers, who bought them 4-7 years ago as investments. I interpret that as "getting out while they can," and I suspect your friend may be there, too.
A McMansion builder near me setup his own little mortgage company and offered incentives and upgrades if you got you're mortgage through him. The incentives were in the 50-60 thousand range.
The mortgage company offered only one product, an option arm with a prepayment penalty.
I would feel comfortable in guessing that none of the buyers were investors, just Joe and Mary Schmoe buying way more home than they could afford.
Both the builder and the mortgage company have filed and are gone.
First Fed burned through about $50Mil of cash last Qtr and has about $50Mil left. Plus last Qtr they borrowed about $500Mil from FHLB. Their assets didn't go up and their deposit base went down about $300Mil.
They report a profit because they count neg am as profit. Without this, they would have reported a large loss. In reality, a lot of the neg am will never be collected.
It seems to me that they must be close to running out of money. I guess they can keep borrowing from FHLB to stay afloat. Countrywide borrowed something like $50Billion a few months ago. At some point does FHLB say 'no more'?
i'm still waiting for the first public HB to BK.
idoc | 01.25.08 - 6:14 pm | #
Wait for the second, that should mark the bottom of the cycle. There might be a 3rd and a 4th, but there will be some left standing after all is said and done, and a package of them could be pretty lucrative. Until then SHORT SHORT AND THEN SHORT SOME MORE. This is especially true after these big bounces we seem to get every month or so.
Charlie,
Thanks for the great post. I am also seriously wondering how long they can continue. I suggest everyone who has 5 minutes read their quarterly report. The marked difference between end of 2006 and end of 2007 is frightening. Not from a big number perspective, but from a deterioration of business.
Quote"During the fourth quarter of 2007, just over 1,800 borrowers, with loan balances of approximately $830 million, reached their maximum level of negative amortization and had a resulting increase in their required payment. The bank said that it estimated that another 2,400 loans totaling approximately $1.1 billion could hit their maximum allowable negative amortization during 2008. "
Does anyone really believe that the neg arm max will really level off in 2008. Colour me skeptical.
Disclosure: I am short FED as I do not believe they can honestly turn the business around for a couple of years, and will they be around by then?!
Tanta - I don't sense many people arguing with me these days just for the sake of arguing - or troll baiting. These are difficult (not necessarily bad - but difficult) times for everyone - whether they're investors or traders - or people worried about their homes or their jobs. Or people with more personal problems. Uncertainty makes people nervous. A little in terms of fun or OT posts tends to relieve the pressures of day-to-day problems.
As for junk - as opposed to simply OT or a little fun - how many times do I have to look at posts that deal with fakepaystubs.com. (see ridiculous post above).
I know this isn't the right thread - but since you mentioned possible changes in software recently - I seriously suggest using software with a "Report This Post" button (assuming you don't want to pre-screen all posts - which would be very tedious IMO). Also software where you can ban posters. Perhaps I might be one of them . Hope you have a great weekend. Roby
I think today's neg-am cap is tomorrow's non-performing asset. The Fed is pushing on a string. No rate cut can replace the subprime borrowers that are now shut out due to tightened credit standards, nor can it replace the "real estate investors" who are either a) under water and/or b) scared sh*tless.
Charlie, you've pointed out a real problem with the disinclination of banks to realize losses. When a normal company goes bankrupt, it is common for them to continue to borrow money after they become insolvent. This means that they are usually far short of being able to satisfy all their creditors when they are liquidated. However banks and thrifts have deposit insurance. Because of this, bank regulators have special powers to examine books and cease operations so that the banks can't dig themselves too deeply. To the extant that a higher percentage of their assets and liabilites are poorly valued or unpriceable (mark to wish, uncollectable neg am, counterparty impared insurance,etc) than has been the case heretofore, the losses are likely to worse when they fail.
Unfortunately we seem to have a degree of collusion as bank regulators seem to be Sgt Schultzing "I see NOOOTHING," to avoid panic. Panic can destroy solvent bank, and it can push a bank on the edge over it. But desprate measures to avoid panic at an insolvent instution simply make losses worse.
I know this isn't the right thread - but since you mentioned possible changes in software recently - I seriously suggest using software with a "Report This Post" button (assuming you don't want to pre-screen all posts - which would be very tedious IMO).
I have a "report this post" button and I use it. When I see spam that makes it through the spam filter. Which I do when I am reading comment threads. Which I stop doing when they become nothing more than therapy for unhappy people who want the rest of us to wade through their self-involved rants, interlarded with trolling and troll-baiting and bouts of lecturing from self-appointed arbiters of the public morality.
So. You want me to stay in the game and police the threads or not? (NB: I live in the eastern time zone and will not stay up all night on comment patrol.)
Here's a rule of thumb: don't do anything in a comment thread you wouldn't do in person. So if you were sitting talking with a table of people at the bar, and the rest of your table left, you could go join another table. However, you wouldn't interrupt that conversation to demand that the new table take up whatever the old table was talking about. Not unless you want to see everyone at the new table start checking their watches and deciding they have an appointment.
Every time I read one of these "I'm bringing this up from the last thread" OT things, I respond by checking my watch and deciding I have an appointment.
Certainly I'm not here to provide you with free therapy. If you want someone whose attention is riveted on you and you only, and who cares desperately about your stress and happiness level, I'd suggest hiring a therapist. It sounds like you can afford it. If you want to use us as your therapy, you have to deal with the fact that we might just tell you to give it a rest. We are not bound by the obligations of professional therapists.
"homeowners used option arms as affordability products(they could only buy the home making the neg-am payment)
They weren't homeowners, they were renters purchasing a call option in hopes that real estate prices really can rise 20% per annum ad infinitum(or atleast until they flipped the place to the real sucker).
Well their call options are expiring worthless and it is time for these people that were living in over their head to get the boot and go find another landlord that will rent them a place.
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Stop foreclosure (costing about 50,000 each to borrower, lender, and The Society total estimated loss 150,000 each foreclosure) which is destroying economy and welfare of people; Use technology to reduce costs & interest rates and let market forces with help of Govt thru FHA, Fannie Mae, Freddie Mac, minimize regulations, who basically cover risks and arrange financing and arrange interest rates of below 5 percent in line with Treasury Rate, Fed Rate and charge risk based insurance from poor credit and thus make mortgage affordable to all. And property values will stabilize Estimated national loss due to foreclosures for 8 million homes @ 150,000 each is 1 (One) trillion dol
time to open the confessionals to consumers....
So soon? Don't the bulk of those hit in 09-10? Or are these people who just ramped up really fast to their max level?
Delinquencies Up 231 Percent in One Quarter
Well, at least we're not into quadruple digit percentages yet.
"Hitting the maximum level of negative amortization doesn't necessarily mean the homeowners will be in trouble. "
It strongly implies it...
Check out page 15 for Bank United:
IIS 7.0 Detailed Error - 404.0 - Not Found
Anyone have an over/under on how many of the 1800 ultimately stop paying within 9 months of the recast.
I'll through 1200 out there...
"Hitting the maximum level of negative amortization doesn't necessarily mean the homeowners will be in trouble. "
But it's a pretty safe bet. If they were using it responsibly, to help over periods of erratic income, they probably wouldn't have hit the limit.
And their payment just jumped some absurd amount...
(To make it clear: thatÂ’s $1.9 billion in forced resets against just $128.1 million currently reserved for loan losses.)
Anyone want to bet that FirstFed goes out of business?
Bob, yes. Option ARMs were intended as a cash management tool - but I think most borrowers used them as affordability products - and they stretched into homes they couldn't afford.
I suspect many of these homeowners will be in trouble - and they won't be able to refinance because they will discover they owe more than their homes are worth.
12th Percentile, those charts showing the resets coming in '09 and '10 didn't factor in people getting to the 15% max neg-am so quickly. Basically a large percentage of Option ARM borrowers have been using the neg-am option - so the problems will hit quicker.
Best Wishes.
"So soon? Don't the bulk of those hit in 09-10? Or are these people who just ramped up really fast to their max level?"
It's your second guess. These folks still face their first interest rate adjustment in 09-10.
If you have nothing to contribute except a witty comment, please reconsider posting here. If you've found a link to useful information, share it with the rest of us so we can all learn more.
Yes, headmaster!
Credit Bubble Stocks: Bank United Non-Performing Loans Doubled in Fourth Quarter
It's your second guess. These folks still face their first interest rate adjustment in 09-10
The overwhelming majority of OA borrowers faced their first interest rate reset one to three months after closing. That's why they're negatively amortizing.
Certainly there were some "hybrid OAs" out there that had a fixed interest rate for 3-5 years. However, if the minimum payment was set low enough (like 30% of the amortizing payment), then those can easily recast (hit balance cap) before they reset (change interest rate).
Not every OA has a 115% cap. Some have 110% caps. By my calculations, an OA originated in January of 2004 with an MTA index could easily have hit a 110% cap last month.
1.93M / 4200 = 460k ave
.
Not just the neg-am option, but the minimum payment neg-am option most likely.
The silver lining is that sooner is better than later.
Help Bring Transparency To Our Financial System
Bring Transparency To Our Financial System
The silver lining is that sooner is better than later.
Agreed, for some of us. But 2008 is going to be some kind of year in California. Wow. Make rolling blackouts seems like the good old days.
Anyone want to bet that FirstFed goes out of business?
Federally chartered thrifts don't get to "go out of business."
Just ask the FDIC.
Correct me if I'm wrong on my thinking. Option ARM holders have essentially these options:
So, to hit your max 15% limit quickest, you have to pick #1 every time (assuming these loans were originated at the same date -- I know they weren't, but just to keep this simple)
We can assume a large percentage of those picking #1 every time did so because that's all they could afford.
So, we should see the weakest borrowers blow up first -- the problem is front-loaded.
Put another way, suppose only 5% of Option ARM holders will blow up over the life of all the loans. But those 5% are going to hit us early -- they won't be evenly spread out over time. Thus, the problem will hit us with more of a shock effect.
Correct me if I'm missing something.
Just for Oliver, a witty comment...
Knock Knock
Who's there !
Oliver !
Oliver who ?
Oliver troubles are over !
oliver's army is here to stay . . .
I'd rather be anywhere else than here today.........
Long Live the Other Elvis!
Oh. This NegAm blow-up information is quite interesting. From Tanta's discussion of it a few weeks back I did not think the loans would blow until 2009-10 because, as I thought I understood it, the OA loans came with caps on the amount they could NegAm each year . . . But 1) I guess a January 2004 loan with a 110% trigger and 2.5% annual NegAm cap could well hit the trigger point now, and 2) when in doubt I think I should assume that Tanta's explanation was probably right and I might have misunderstood part of it.
cheers
Joe
And another...
Knock Knock
Who's there !
Oliver !
Oliver who ?
Oliver 'nother one if you've got it !
I definitely disagree with Oliver. We need witty comments to survive this mess.
ac made my day with the comment on an earlier thread about a friend who is walking away from a paid off house just to be part of the in crowd.
And on and on..
Knock Knock
Who's there !
Ollie !
Ollie who ?
Ollie time you say that, I wish you would cut it out !
But really, why continue...
Knock Knock
Who's there !
Oliver !
Oliver who ?
Oliver 'nother one if you've got it !
MTHood, so long as the environment remains constant you might get the weakest all front loaded but I'd imagine there are some knock-on effects that necessarily come into play. Just cause MI showed large numbers of foreclosures first doesn't mean CA isn't the bigger problem.
Have a good Friday night...
Knock Knock
Who's there !
Oliver !
Oliver who ?
Oliver, but she doesn't love me !
Again?!?
Knock Knock
Who's there !
Olivier !
Olivier who ?
Olivier 'nother one if you've got it !
Enough!!
Knock Knock
Who's there !
Ollie !
Ollie who ?
Ollie time you do that I want to scream !
Not only do these payments reset at with full amortization, most of these loans had a silent second.
The 1st TD has now balooned from 80% to 90-95% based on accrued and compound interest. The second is still at 20% with negative equity if property values did not decrease.
In all liklihood the property taxes have not been paid. And prices are off 10-25%.
These loans were ALT- A no qualifiers. First Fed made a ton of these in Sacramento area on new homes to speculators.
No PMI on these loans. And First Fed kept the majority on their books and did not repackage.
Managment has used Wall Street to prop up its stock. They had bank analyst recommending it as buy.Then bought back $50 million worth of stock when the stock was much higher.
The buyback makes EPS higher since fewer shares outstanding. But now they need the capital and could have even bought back more shares at a lower price.
The ALLL reserve is decieving because the balance sheet has shrunk dramatically.
First Fed business model was based on World Savings. Only World Savings sold out at the top of the market to Wachovia.
Lower Interest rates and refinancing will not help First Fed borrowers. These properties will go back. The silent seconds will be wiped clean. FirstFed will eat the rest and get the property back and the losses will be very significant.
The worst part is that they took the accrued income in when it was being negatively amortized. Now they day of reckoning is here they will have to go to the confessional stating that interest was never earned.
I guess they won't be earning any prepayment penalties either.
The trouble is that "OA" is not really a homogeneous population of loans.
There are many, many variations in index, margins, balance cap, and rate adjustment frequency, plus the issue of LTV at origination and quality of appraisal.
Add to that the very basic difficulty in projecting these things: you have to keep updating your projections not just with actual borrower behavior (amount of neg am) but index movement. At the rate the Federal Reserve is going, we'll be giving at least some of these loans another few months at least (the ones with a monthly rate adjustment, anyway).
But even the ones that are a year or two away from recast are still (unless they're hybrids) experiencing annual payment increases (usually 7.5% a year). Some of them won't make it to reset just because they can't withstand the "normal" increases.
ambac subpeona-
The resource cannot be found.
just as I said in hedge world-
"This time, the losses are hitting players of a strategy known as price momentum, which bets winning stocks will continue rising and losing stocks will keep falling. On Wednesday, these strategies experienced their fourth-biggest loss since July 1950, according to a research note from Matthew Rothman, head of Quantitative Equity Strategies at Lehman Brothers."
Expired
Option ARMs were intended as a cash management tool - but I think most borrowers used them as affordability products - and they stretched into homes they couldn't afford.
Because that's the way these loans were marketed by the REIC.
Take a product that was originally intended for wealthy stockbrokers and executives that receive most of their compensation in the form of year-end or quarterly bonuses and mass market it to strawberry pickers, Wall Mart greeters & unemployed 24-year-old sociopaths. What could go wrong?
Correct me if I'm wrong but before recently, these were very rare loans suitable to specific types of incomes that are uncommon.
It seems to me that, regardless of reset times, the vast majority of these that still exist will result in either a refinance (i.e. the loan gets paid) or reset. And, refinancing out of them is getting impossible without bringing cash to the table).
To have an idea of how many will have problems, a company just has to count them. If it's out there, it's gonna default.
All First Fed has to do is take an inventory of it's outstanding OP ARMS, write off all presumed income from unpaid interest, presume the cost of default or resale (60-70%) and go from there. I'm guessing that so few will be able to make FirstFed whole it's insignificant.
Enough Neal!
Knock Knock
Who's there !
Neal !
Neal who ?
Neal down and beg for Oliver's forgiveness!
This time, the losses are hitting players of a strategy known as price momentum, which bets winning stocks will continue rising and losing stocks will keep falling
At least they used the term "bets".
How boring is your job if you are employed in price momentum firm? Duh...stock go that way...I follow...
Excerpt from the quant story linked above:
"The problem with some of these strategies is that they're developed "looking in a rear-view mirror," which is helpful when markets are calm but not when things start to behave differently than they have in the past, said Bill Crerend, who runs a $4 billion fund of hedge funds for Bank of New York Mellon Corp."
Hmmm. Haven't these people ever heard the phrase, "Past performance is no guarantee of future results?" It's on every prospectus I ever looked at, along with (my personal favorite) "This page intentionally left blank."
for any of u guys interested, it looks to me like the HB's are getting ready to roll over from overbought territory. several formed a spinning top today, i.e., big jump at the open with large fade throughout day. will be interesting going into FOMC mtg. just talkin my book but do keep an eye out.
risk-
guess the hedgies didn't get the gse cap mod memo early enough.
Mish's Global etc.
on HB's runup.
Federally chartered thrifts don't get to "go out of business."
Just ask the FDIC.
Tanta | Homepage | 01.25.08 - 5:24 pm | #
Can ya show us a little more leg on this?
I mean didn't we go thru the S&L crisis already where many insured S&Ls failed?
What's the dif?
Very OT - Unirealist - Response to message in an earlier thread. I am a registered Republican - not a Republican. Same reason I was a registered Democrat for a long time. In Florida - most counties are predominantly one party or the other. And if you aren't registered in the dominant party - you can't vote in the primaries that matter (we have closed primaries). We now have a law in Florida that tries to deal with that problem. If there is no candidate running from the other party for a particular office (which happens a lot) - everyone can vote in a primary. But what happens sometimes is the dominant party gets some ridiculous candidate to run in the general election from the other party to deprive people from the other party and independents from voting in the primary. In general elections - I'd say I vote for Repubicans about 40% of the time - for Democrats about 40% of the time - and about 20% of the time the candidates are both so disgusting I don't vote at all.
Any other Florida people out there? How many robocalls did you get today? I got 6 from Romney before noon. One from McCain in the afternoon on my answering machine. None from the other candidates. For those of you not in Florida - our primary is on Tuesday. Probably the first real "party" primary. Where people vote - instead of caucus. And where independents can't vote. Democrats can vote - but because of some obscure party rules I haven't paid much attention to - their votes don't count. If I were a Democrat - I'd be really pi****. There are fewer people in Iowa and New Hampshire combined than in the metro Miami area.
Note that I am voting for McCain on Tuesday. I disagree with him on some very important issues - like Iraq and abortion. But at least the guy has principles - and he isn't changing his mind all over the place - or pandering to us. Giuliani's newest pitch is having a national hurricane catastrophe fund which will bail us out if there's a bad storm (him too - he owns a waterfront house in Florida). Terrible idea IMO. And I'm sure you guys in California - who have enough problems with earthquake insurance - wouldn't be kindly disposed to such a bailout fund.
BTW - I still haven't heard a peep from AARP about the fiscal stimulus plan. OTOH - I think only one paper I read today - the NYT - mentioned that people who aren't working - including retired people - won't be getting any money back. Roby
We can assume a large percentage of those picking #1 [lowest payment] every time did so because that's all they could afford.
I think for many people it wasn't 100% an issue of "could afford", but was best for their cash flow. In particular for flippers carrying cost becomes a huge issue, so the lowest payment is perfect (in effect they get to finance their carrying cost). So I'd group resets roughly into 3 categories:
1) people who could afford an amortizing payment but chose not to for lifestyle reasons (Real Housewives of OC)
2) people who chose a non-amortizing payment for cashflow reasons (Flip That House)
3) people who chose a non-amortizing payment because it was all they could afford (NINJA/subprime/...)
For #1 the end game will largely be sale or refinance and cut back on lifestyle. For #2 the end game will probably be sale or short sale (or jingle mail, resulting in "pier mortgages"?) For #3 the end game will almost certainly be short sale or foreclosure, since there's unlikely to be a buyer who can pay what they did (even if they wanted to they couldn't get the loan).
I don't have any data on where in these three groups most borrowers lie, but my intuition is that 1 and 2 are larger than 3.
SEC to Rework Rules After Funds Struggled With Subprime Prices (Market Ticker has a few choice words about this link.)
SEC to Rework Rules After Funds Struggled With Subprime Prices - Bloomberg.com
Life is to serious not to have fun.
on HB's runup.
idoc | 01.25.08 - 6:05 pm |
idoc,
I'll back up what Mike Morgan says. The moron builders are still building like crazy in areas here in SW Fl. And yes,there are buildings that for free would still cause you horrible liabilities/inability to get rid of.
Chris
Cobra
i'm still waiting for the first public HB to BK.
Robyn:
This shit has been going on all day.
QUIT IT.
Prior threads have been thoroughly junked up with off-topic ramblings and troll-baiting.
YOU MAY NOT CONTINUE ON IN THE NEXT THREAD.
Come on, folks. I've already abandoned the last four threads because of this. Can't you all leave ONE THREAD for those of us who want to talk about the topic?
FOR THE REST OF YOU: THIS POST IS NOT AN INVITATION TO BAIT ROBYN OR ARGUE ABOUT ARGUING ABOUT ARGUING ABOUT OFF-TOPIC POSTS. GO TO EARLIER THREADS TO DO THAT. NOT THIS ONE. I MEAN IT.
What I simply can't understand is how they can get away with setting reserves at any number they choose. They seem to decide based on their portfolio size and some bond insurer formula about losses in 2005 rather than real world data like actual defaults and trends along with anticipated recovery, based on their own experience.
Why do we have regulators? Is it the OCC or FDIC that needs to buy off on their fairy tale financial reporting.
These guys are running cash flow negative. One day they will go from profits of $61MM straight into receivership and common from $35 to ZERO, overnight. There is no way these chumps get saved by anything Paulson can cobble together. It's a charade.
Cobra
i'm still waiting for the first public HB to BK.
Sounds like a big chunk of that stimulus package could be going to the homebuilders.
I think the industry could end up looking like the airline industry in the past: "too important to go under".
That doesn't mean there won't be individual bankruptcies, but I think if we left it on cruise control the entire industry would collapse.
I don't see that happening.
But the fear...
A more immediate fear I would think is that they will owe more and more on a property that is worth less and less. So if they have any sense at all -- doubtful in many cases perhaps -- they will walk away.
idoc | 01.25.08 - 6:14 pm |
Somebody at work mentioned Adams Homes,but they look to be building per the online site.
You should see the 55+ community Centex is building north of me...If it gets completed I will be amazed. Oh,and the half finished houses everywhere.
And yes,only a teeeeeny fraction of FC's are on the market as of now.
Chris
I don't see that happening.
For the HBs to prosper they have to build and sell homes. I don't see the markets (securitization), including the GSEs, absorbing enough new mortgage debt to enable HBs to make money like they did before. Times have changed.
Cobra
weren't u Ella and Misean talking about u reporting something to us today?
ac [I think the industry could end up looking like the airline industry in the past: "too important to go under".]
c'mon. There's an argument to be made for keeping airlines afloat for a while. Airlines are an asset that have national financial interests at their core. Airports, businesses for travel... all sorts of very defensible arguments. Homebuilders, not so much. We can have 1/5 of the national builders left and no one would notice. After all, there are plenty of private builders that could come along to satisfy demand.
agree barely
I believe the basic story with the option ARM is the intention to flip and make a profit before time ran out. Of course, not counting on the bubble to pop.
re: HB being to important to fail
I'm not saying that this type of statement is to stupid to come out of our political leaders mouths but this isn't like the airlines. Lots of small contractors are out there willing to build homes. HB does not require the massive amounts of captial of the airline industry. As an added benefit we might get neighborhoods with some diversity and character.
i know a RE broker who i bought a condo from 5 y ago who had loaded up on about a dozen condos up and down Calif with specifically negam loans. strongly recomm. i do same with my condo but didn't listen and did 30y fixed. when i called him last Spring he said he was fine and would just stick it out. i should give him a call...
CR - I do think you could have added some levity by adding a background sound bite - Jingle Bells perhaps?
The bright side is that these folks can draw the equity in the form of "payments" (thats two years of free rent) and the property goes REO (thats another year of free rent). So my big question is: Who is the most financial savy in this equasion?
idoc [i should give him a call..]
Yeah. Remember to ask him if he's already identified which unit is high enough to jump out of so he doesn't need hospitalization.
r0m30
Exactly.
Propping up homebuilders when we have a year of inventory in the system? someone should check into how much they are sending to the politicians if this is the case.
if the planes don't fly, we've got problems RIGHT NOW and all businesses suffer. If no homes get built starting tomorrow, we've got no problems for at least a year, probably two.
About Large public HBs - We will see more than 1 go Ch11 and common to zero this year. They all scaled their businesses with debtloads to satisfy 2005 level demand. Their lenders will finally say "no mas" and force the issue. I wouldn't be surprised to see 25% de-listed this year. They may emerge leaner and then force the others into BK as they will be scaled to survive on the scraps that remain of demand.
HBs shouldn't be propped up but I think the issue of half-finished developments is non-trivial. If big players start falling, states and localities need to pay close attention to whom various promises to complete infrastructure falls, along with deposits, bonds, etc.
Wow---- completion bonds. A whole new industry to short
Tanta - An on topic question:
From an underwriting perspective what are the norms for deliquincies. Seeing a number like "+231%" is alarming. But I have no base from which to judge. Numbers only mean something if they are put into context and to understand trends a historical context is warrented. Now, I understand not all loan products are equal nor might they yeild similiar expectations. However, if the objective is to understand the economic meaning, context would be nice. Has there been discussion in any uber posts on this matter?
"i know a RE broker who i bought a condo from 5 y ago who had loaded up on about a dozen condos up and down Calif with specifically negam loans. strongly recomm. i do same with my condo but didn't listen and did 30y fixed. when i called him last Spring he said he was fine and would just stick it out. i should give him a call..."
In my corner of California, a good percentage of the high-end homes being offered for sale seem to be from brokers, who bought them 4-7 years ago as investments. I interpret that as "getting out while they can," and I suspect your friend may be there, too.
A McMansion builder near me setup his own little mortgage company and offered incentives and upgrades if you got you're mortgage through him. The incentives were in the 50-60 thousand range.
The mortgage company offered only one product, an option arm with a prepayment penalty.
I would feel comfortable in guessing that none of the buyers were investors, just Joe and Mary Schmoe buying way more home than they could afford.
Both the builder and the mortgage company have filed and are gone.
First Fed burned through about $50Mil of cash last Qtr and has about $50Mil left. Plus last Qtr they borrowed about $500Mil from FHLB. Their assets didn't go up and their deposit base went down about $300Mil.
They report a profit because they count neg am as profit. Without this, they would have reported a large loss. In reality, a lot of the neg am will never be collected.
It seems to me that they must be close to running out of money. I guess they can keep borrowing from FHLB to stay afloat. Countrywide borrowed something like $50Billion a few months ago. At some point does FHLB say 'no more'?
i'm still waiting for the first public HB to BK.
idoc | 01.25.08 - 6:14 pm | #
Wait for the second, that should mark the bottom of the cycle. There might be a 3rd and a 4th, but there will be some left standing after all is said and done, and a package of them could be pretty lucrative. Until then SHORT SHORT AND THEN SHORT SOME MORE. This is especially true after these big bounces we seem to get every month or so.
Charlie,
Thanks for the great post. I am also seriously wondering how long they can continue. I suggest everyone who has 5 minutes read their quarterly report. The marked difference between end of 2006 and end of 2007 is frightening. Not from a big number perspective, but from a deterioration of business.
Quote"During the fourth quarter of 2007, just over 1,800 borrowers, with loan balances of approximately $830 million, reached their maximum level of negative amortization and had a resulting increase in their required payment. The bank said that it estimated that another 2,400 loans totaling approximately $1.1 billion could hit their maximum allowable negative amortization during 2008. "
Does anyone really believe that the neg arm max will really level off in 2008. Colour me skeptical.
Disclosure: I am short FED as I do not believe they can honestly turn the business around for a couple of years, and will they be around by then?!
Cheers
Tanta - I don't sense many people arguing with me these days just for the sake of arguing - or troll baiting. These are difficult (not necessarily bad - but difficult) times for everyone - whether they're investors or traders - or people worried about their homes or their jobs. Or people with more personal problems. Uncertainty makes people nervous. A little in terms of fun or OT posts tends to relieve the pressures of day-to-day problems.
As for junk - as opposed to simply OT or a little fun - how many times do I have to look at posts that deal with fakepaystubs.com. (see ridiculous post above).
I know this isn't the right thread - but since you mentioned possible changes in software recently - I seriously suggest using software with a "Report This Post" button (assuming you don't want to pre-screen all posts - which would be very tedious IMO). Also software where you can ban posters. Perhaps I might be one of them
. Hope you have a great weekend. Roby
Robyn
A nice post. :>)
I think today's neg-am cap is tomorrow's non-performing asset. The Fed is pushing on a string. No rate cut can replace the subprime borrowers that are now shut out due to tightened credit standards, nor can it replace the "real estate investors" who are either a) under water and/or b) scared sh*tless.
Only to stop all the madness of a recesssion is o get some insight how to make money online to avoid this for free at Lively Money: If you digg it , They will pay you?
those were scheduled for 2010/2012
recession will turn them into pop cor
OT but good . . .
Bernanke's Easing Thwarted by Surging Commercial Mortgage Rates - Bloomberg.com
Anon 6:10 your forgetting
4.) People who chose the minimum payment because they had no real conception of the loan terms.
Charlie, you've pointed out a real problem with the disinclination of banks to realize losses. When a normal company goes bankrupt, it is common for them to continue to borrow money after they become insolvent. This means that they are usually far short of being able to satisfy all their creditors when they are liquidated. However banks and thrifts have deposit insurance. Because of this, bank regulators have special powers to examine books and cease operations so that the banks can't dig themselves too deeply. To the extant that a higher percentage of their assets and liabilites are poorly valued or unpriceable (mark to wish, uncollectable neg am, counterparty impared insurance,etc) than has been the case heretofore, the losses are likely to worse when they fail.
Unfortunately we seem to have a degree of collusion as bank regulators seem to be Sgt Schultzing "I see NOOOTHING," to avoid panic. Panic can destroy solvent bank, and it can push a bank on the edge over it. But desprate measures to avoid panic at an insolvent instution simply make losses worse.
I know this isn't the right thread - but since you mentioned possible changes in software recently - I seriously suggest using software with a "Report This Post" button (assuming you don't want to pre-screen all posts - which would be very tedious IMO).
I have a "report this post" button and I use it. When I see spam that makes it through the spam filter. Which I do when I am reading comment threads. Which I stop doing when they become nothing more than therapy for unhappy people who want the rest of us to wade through their self-involved rants, interlarded with trolling and troll-baiting and bouts of lecturing from self-appointed arbiters of the public morality.
So. You want me to stay in the game and police the threads or not? (NB: I live in the eastern time zone and will not stay up all night on comment patrol.)
Here's a rule of thumb: don't do anything in a comment thread you wouldn't do in person. So if you were sitting talking with a table of people at the bar, and the rest of your table left, you could go join another table. However, you wouldn't interrupt that conversation to demand that the new table take up whatever the old table was talking about. Not unless you want to see everyone at the new table start checking their watches and deciding they have an appointment.
Every time I read one of these "I'm bringing this up from the last thread" OT things, I respond by checking my watch and deciding I have an appointment.
Certainly I'm not here to provide you with free therapy. If you want someone whose attention is riveted on you and you only, and who cares desperately about your stress and happiness level, I'd suggest hiring a therapist. It sounds like you can afford it. If you want to use us as your therapy, you have to deal with the fact that we might just tell you to give it a rest. We are not bound by the obligations of professional therapists.
"homeowners used option arms as affordability products(they could only buy the home making the neg-am payment)
They weren't homeowners, they were renters purchasing a call option in hopes that real estate prices really can rise 20% per annum ad infinitum(or atleast until they flipped the place to the real sucker).
Well their call options are expiring worthless and it is time for these people that were living in over their head to get the boot and go find another landlord that will rent them a place.
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