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As we are talking in this specific context about Alt-A, I for one believe that most of these loans did stretch too far in the beginning, and so even first rate resets on IOs or fully-amortizing ARMs will cause a marked increase in delinquencies in the absence of the borrower's ability to refinance at reset into a new discounted ARM
although I have no proof, I also believe this. It was also seen in the subprime space. It's one reason why we saw/are seeing people become delinquient within months of closing.
IMO, this was especially problematic in the new-construction space and the investment space. So many of those people never planned on living in their units. just buy, close, sell the next day. or buy, close, rent out for 2x PITI the next day.
first
Tanta,
It's great to see you back posting more often. As well it's good to see your optimism with respect to readers attention span shine through,
"I hope that clears it up a bit, at least for the next week or two.
although I have no proof, I also believe this.
The trouble with Alt-A data is that if you look at the reported DTIs at origination, they don't often look that bad.
But they were overwhelmingly based on "stated income," and we are finding out that a whole lot of that was ad-libbed.
They also involved mostly not escrowing for taxes and insurance. The reported DTIs do include T&I, but if you don't make the borrower pay that into escrow every month, you can find a lot of people who let the T&I portion wander into other parts of the monthly household budget. Then they get strapped at tax time.
The other thing that always amused me about the IO mania was all the mortage boosters arguing that these were great loans for those famous borrowers with "unstable" incomes, because they'd make principal payments when cash flow was high, but they could make IO payments when cash flow was down and still manage just great.
I haven't seen any evidence that IO borrowers over time have been making significant periodic principal payments. So much for that theory.
Good morning, Tanta. Thank you for the morning read with my breakfast cuppa.
"I hope that clears it up a bit, ..."
Yep, it does, and it doesn't look good.
" haven't seen any evidence that IO borrowers over time have been making significant periodic principal payments. So much for that theory.
Ah but they had been - right up until 2006/2007. They had been making regular IO payments all along and 1 giant payment when they sold the property. Variable income stream due ot flipping for a living. Not...
a whole lot of that was ad-libbed
!Hilarious!
"What's that, your cat does pet food commercials? That's great! Sign here."
I haven't seen any evidence that IO borrowers over time have been making significant periodic principal payments
I remember when the first Wells Fargo study came out about Option ARM payments. At the time it was something like 70% paying the MINIMUM payment or IO payment, and 30% paying "some" principal. at the time, many of the bubble-bulls said look! you see, 1/3rd of all people are paying "extra" to their mortgage!
as though paying SOME principal equalled paying "extra". of course, we all know that the key here was that 70% of the borrowers were paying the IO or minimum payment. not good. not good.
YtL, as CR readers know, this isn't going to end well either. We're due for a lot of pain before [mumbled optimistically] sanity returns.
"The trouble with Alt-A data is that if you look at the reported DTIs at origination, they don't often look that bad.
But they were overwhelmingly based on "stated income," and we are finding out that a whole lot of that was ad-libbed."
Had drinks with a former RE boy the other night. He said virtually ALL of his loans is SoCal the last two years were (embellished)stated income.
I bought in 04 w/ an IO (20%dn). In Fall of 05 refied to a neg-am, then got a HELOC to fix up house to sell(market tanked....and now stopped making pmts. as of 5/08). Filing Bk. Neg-am has grown from 710k to 890k + the 75k HELOC...this is a common scenario in So.Cal.....NOD has not been filed...so we're 4-6mos. out from REO status. 09-10 will be financial crisis for OC,and more expensive areas of Ca. People w/ Neg-ams will walk before recast...it's obvious we can't afford recast. Thought we could refi out of it...but the music stopped.
I can't tell you how many times I tried to explain how this worked at closing and got only blank looks. If I had tried to explain from those days to this, the people still wouldn't understand.
Also, I couple of times I asked the broker how come taxes and Insurance weren't included and the response was that they couldn't afford the payments with the taxes and insurance. Which was obvious because we were often paying a year or 2's past taxes, and bringing insurance current (remember insurance is very expensive here in S. Florida).
So how could they afford a lump sum in the future??? The lenders obviously just didn't care.
Learning--did you buy to flip, or actually think you were gonna make the payments? Did you understand what you were doing?
"YtL, as CR readers know, this isn't going to end well either"
not sure I understand the punctuation of "either", or to what part of my post your comment refers...
I agree, this will not end well. (either?)
It is that mismatch between rate reset and payment change that actually creates the potential for negative amortization; the "minimum payment" gets outstripped by the actual interest due because it increases much more slowly than the rate does.
So then the current low short-term interest rates will take a bit of the sting out of the Option ARMS by delaying the recasts. This might be bad long-term though since if the Option ARM bomb is delayed enough it may get blamed on the people trying to fix it in 2010 rather than the people responsible in 2003-8.
Good post, tanta.
Foolishly bought w/ intention of splitting pmt. w/fiance (BAD idea...had to have him move out 2 mos. later after physical threats). So ended up w/ a house I should never have bought...
Thought I could at least get it in good shape and sell for amt. I bought maybe making enough to put dn. on a small condo...since I had put $ down).
Yes I understood what an Option-arm was but figured I'd refi w/in a year or sell the house and get out from under my stupid choice. I had no idea (and I'm not the only one) that the credit market would seize up as of last summer.
I had never reada financial blog as of last August, now I read about 20 every morning.
I'm ok w/ bk. Yes it will ruin my credit. I will and have cut back on all unnecessary spending and will buy in time but for now will rent. After this most recent experience I think homeowership is a bit over-rated (for me at least).
Nobody in my beach neighborhood could afford their homes if they qualified under 3x your income rule. These homes are 6-8x most people's income, even at today's prices (800k-1 million+).
As credit contracts even further (and more foreclosures come on the mkt.)this area will tank repeatedly.
It was probably a gratuitous comment, YtL. Whether were in third inning, fourth hole, or fifth round, the absurdity that started eight years ago and crescendoed in '05 or '06, the mess and destruction is going to pile up, and pile up, until there's a new lending landscape [pun intended.]
Loan was 710k, grew to 790k + 75k HELOC not 890k...my mistake.
Thanks for the clarification on recast/reset and the data on AltA mortgage rate changes. The graphic is compelling.
I can only think of two things that would make this more complete: (1) Does Clayton or anyone else have data on the other classes of adjustable mortgages? (2) Is this data available in dollar terms (vice percentages)?
Keep up the good work.
Hey there are LOTS of people with "unstable" incomes. But few of them are bonus dependant Wall Street brokers or other people to whom you'd be willing to lend your money. Most of them are the "semi-employed" or "self-(un)employed," which you'd only be willing to lend OTHER PEOPLE'S MONEY to.
Most of them are the "semi-employed" or "self-(un)employed," which you'd only be willing to lend OTHER PEOPLE'S MONEY to
That encapsulates one of the primary causes of the mess we are experiencing - all lending was really OPM (other people's money).
Tanta,
I was under the impression (from CFC sales training) that recast in terms of the option arm meant:
once either the 5 year min pay option/interest only option expires, or the principal balance of the loan reaches 125% of the original loan amount, the loan will recast into a 25 year mortgage based on the new principal balance of the loan- Is this not correct?
Nevermind. It is all in the post. Your post, as always, answered the question.
Thanks again for the great read.
2 questions
1) do ARMs recast on the basis of loan to value?
2) do ARMs ever make sense in a falling market?
CR mentioned in Swedish media:
Finanskrisen tar ny sats - Makroekonomi - E24
About the coming of Alt-A wave.
För bankerna är det ett värre problem eftersom de enligt bloggen Calculated Risk "värdepapperiserats i lägre utsträckning än subprime-lån och därmed till större del finns kvar i bankernas balansräkningar.
However, for any ARM borrower who qualified at the highest possible debt-to-income ratio they could manage, any payment change, even one not quite as shocking as the recast on an OA or an IO, can tip the balance.
Fair Economist, are you paying attention? Tanta nailed it (as usual).
So, Tanta, hows come this post doesn't rate an UberNerd label? Do I just not understand the diff between UberNerdity and mere wonkery?
BTW, thanx to you and CR for your awesomely educational and enlightening posts.
We are all värdepapperiserats now.
As well it's good to see your optimism with respect to readers attention span shine through,
Heh. I am also always surprised to see how many commenters didn't actually read the post before coming in to ask questions or "correct" the explanation. We readers need to improve.
Learning - thanks for coming here to share your story. It can't be fun.
Learning - thanks for coming here to share your story. It can't be fun.
Emma Anne | 08.13.08 - 1:06 pm | #
Ditto. what Emma Anne said, and what Shakespeare said:
Sigh no more, ladies, sigh no more;
Men were deceivers ever;
One foot in sea and one on shore,
To one thing constant never;
Then sigh not so,
But let them go,
And be you blithe and bonny;
Converting all your sounds of woe
Into: Hey nonny, nonny.
2 questions
1) do ARMs recast on the basis of loan to value?
2) do ARMs ever make sense in a falling market?
-No Frog Speak
NFS, Answer, #1 is no-they recast by time period only, with exception to option-ARMS which can recast sooner if your new principal amount (original principal + any unpaid interest) exceeds a certain cap-usually 115% of 125% of the original principal of the loan at the beginning. Answer #2, hard to say-it probably would depend more on how long you plan to stay in the house. If just for a few years they may make more sense-a "traditional" ARM that is. As far as the other ARM products go, I wouldn't touch those at all - they may not ever be available again after this settles down.
Thanks Doc.
Thank you, Tanta. As a non-nerd (and definitley not an uber one!), this was very helpful.
Scary, but helpful.