CR, thank you for pointing out the difference between reset and recast. Tanta would have worn herself out lately, chastising folks for not making the distinction.
At reset, rate floats at 1 year LIBOR + margin = 1.78% + 2.25% = 4% roughly.
ARM also amortizes over remaining life of loan (25 years assuming 5-1 hybrid)
PMT on 4% amortizing loan over 25 years = $523
523/417 = 25% increase.
Of course, if LIBOR increases more, things get worse, and it is pretty clear where rates are going (and swap spreads are at very normal levels now, so no relief from spread tightening).
Most Alt As and Jumbos were 5 year hybrids, some 7 years, very few 10 years, some fixed.
Later in life when banks started caring about credit risk, they decoupled the rate reset from the IO period (set the IO period to 10 years), but that wasn't until late 2007/early 2008 in most cases.
"he stuff this year is acutally just creating, updating, and checking address lists. Canvassing/interviewing acutal people doesn't happen until next year."
Thanks, I was wondering why no one knocked on my door yet.
At least then we have more jobs for people next year!
Thanks, CR. There are SO many people trying for a loan modification right now.
Here's what I'd like to see: A graph and analysis of the complete loan modifications, with data that shows us just when those loan mods are set to adjust.
For example, many homeowners are bragging that they got approved for a loan mod that will keep their interest rate at X until a date in the future. Just when will all these loan mods adjust upwards?
"You've created a meaningless hodge-podge in your explanation. Clearly, you don't have an understanding of how these products actually work."
I assume you are being facetious?
Also, I should point out that many subprime hyrbids actually had a floor on their rate at the initial rate. Not that subprime is much of an issue anymore, but that was a particularly insidious product twist.
Jas Bot (profile) wrote on Fri 5/8
reply ignore user
I look forward ten and twenty years allocating big money capital, and US treasury STRIPS are the only thing to own, along with Swiss Franks, and gold...
"For example, many homeowners are bragging that they got approved for a loan mod that will keep their interest rate at X until a date in the future. Just when will all these loan mods adjust upwards?"
Most loan mods set the payment at an IO payment at a fixed rate for 5 years.
this weird govt program for mods (where people get DQ, they try to keep them current. etc) is really weird, it is basically a buy-down - the rate steps up every year for five years.
though I doubt your friends are in that camp, not something you would brag about.
Love the charts, thanks for posting them, nice to see the results
The counterpoint: even though the recasts have been pulled forward, the time between initial delinquency and short sale or foreclosure has been growing larger.
The people with option ARMs may have only cared about the monthly payment amount. Even if they could refi into a conventional, the payment would be too much for them, because they'd have to pay principal and interest.
"However there is a difference between the original recast date, and the actual recast date - because negatively amortizing loans hit the recast ceiling earlier than the original forecast."
Was the original date based on the assumption the borrower at least paid the interest each month?
EvilHenryPaulson, yeah, but hasn't the time between delinquency and foreclosure been impacted by the moratorium? I think we are about to see a flood of after the moratorium foreclosures. May will be a very busy foreclosure month ...
IMO, the underwriting on the pay option ARMs was so horrible that these loans are already in default and probably still being carried on the banks books thanks to the moratorium and banks just not wanting to reveal the truth on there books.
Sadly, too many of these homes have already declined in value and are vacant and deteriorating and/or being vandalized.
Like all inventory you have to move it or it just deteriorates further.
Look for banks to dump properties big time once they realize there are no buyers over the spring and summer.
Bob_in_MA, yeah, the lenders have been "stunned" that a majority of Option ARM borrowers all selected the neg Am option! I'm not sure how they calculated the original recast date, but I know it has been moving forward.
Excerpt: The Fed ultimately accepted some of the banks' pleas. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.
Gee, I bet folks who invested in those banks based on the "stress test" results are happy to hear about this fact now, after trading has closed for the week. Or was this a generally known fact?
On the subject of delayed consequences: I've read two forecasts by people I really respect in the last couple days (Russell Napier and Andy Xie) that predict we will have a little upswing (Xie refers specifically to people trying to refloat bubbles, EM, Commodities, etc.) and then a small bout of inflation will force up the Treasury bond rate and then the $hit will really hit the fan. Napier sees the "recovery" lasting two years.
Ladies and gentlemen: the story you are about to hear is true. Only the terms have been changed to protect the financial system...
The trail of the embezzlers was dead cold in Los Angeles. We were working the day watch out of financial robbery division. My partner's Ben Romero. The boss is Ed Backstrand, chief of detectives. My name's Friday.
"For those of us who like watching train wrecks, please do an example of an Option ARM!! "
Well, that is really tough, actually. You need a calculator for that, but let me try, I happen to have one...
OK, most Option ARMs are MTA based, have a teaser rate/payment, and a margin over the MTA.
Let's take a typical OA from Jul 2006. Teaser rate 1%, margin over MTA 3%.
The min payment is based on the 1% amortized over the term, say 30 years (though some were 40 years).
The gap between the min payment at the amortized teaser rate, and the IO payment at the fully indexed rate, is the amount of neg am.
The other thing to realize about the min payment is it rises by 7.5% every year (why, I don't know).
Using the MTA path today in the above example, and making only the min payment, the borrower would have neg-amed by 6%.
unfortunately, most OAs were in Florida and SoCal, so that 6% gets added to whatever house price decline you got.
assuming MTA stays flat from here through month 60, the min payment is $430 per 100K at month 60 and 578 in month 61, a 35% increase.
interestingly enough. at today's rates, the neg am has basically stopped, as the min payment is roughly equal to the IO payment. So a 35% increase in payment, with 6% higher loan balance than before, and whatever HPI decline you have had.
the problem is, you have to understand the mindset of the OA borrower. they are not like other borrowers. it is all about cashflow. most of these people refinanced every year to avoid the 7.5% increase. no joke. many of these were at 80LTV with a 10% second. almost all were stated income.
these were the true toxic assets of the mortgage world. no coincidence all the major pushers are dead now.
"The people with option ARMs may have only cared about the monthly payment amount. Even if they could refi into a conventional, the payment would be too much for them, because they'd have to pay principal and interest."
True dat. Sources tell me that, when contacted for a mod, most won't even answer the phone (though of course, maybe they are not even in the property anymore).
If the Alt-A reset disaster turns out to be worse than the sub prime debacle..... I will be able to hear all those people in LaJolla and Rancho-San-Rancho-Bella-Plaza-Santa-Fuente-San-Rico screaming for guillotines and torches
This business week article reads like, "hey, great news, resets aren't a problem after all."
But the problem becomes worse. Borrowers who don't see a reset now because of low rates, "complacency," will not do anything to take care of the problem. Not like most of them could anyway with the negative equity that they have. So the resets that were/are due now don't become a major problem until they are added to the ones set to recast/reset next year, or the year after that while prices are still falling.
And then when rates finally do blow up, and they will, the whole lot of them get reset at once. This May with next May's, This June's with next June's. This looks to me like an even bigger time bomb than when these charts were first produced.
CR, many thanks for the updated charts. If there's to be a problem with the owners of my rental, it'll come with the peak of recasts. So I'm trying to follow this as well as I can.
Not so much talk about bear market rallies these days I notice.
I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness.
" IMO, the underwriting on the pay option ARMs was so horrible that these loans are already in default and probably still being carried on the banks books thanks to the moratorium and banks just not wanting to reveal the truth on there books.
Sadly, too many of these homes have already declined in value and are vacant and deteriorating and/or being vandalized."
You are 100% correct. As I mentioned above, most of those borrowers are not even around, or don't want to be contacted, etc.
Problem is, to do most mods, you need to prove income, employment, etc., and most OA borrowers are either unwilling or unable to do so.
I'm moving into very anecdotal territory, but a number of commentators have described properties that are delinquent for more than a year. I think the foreclosure moratoria was somewhat self-serving for the banks as well, and would have mostly some the same in its absence. In short, there will be a flood when the moratoria are lifted but not just because of the moratoria
It's not like there was much immediate difference when the moratoria officially began. Some were betting it all on house prices recovering, some were taking advantage of being able to delay recognition of losses, some were wary of flooding a market with excess supply, some weren't prepared to process so many foreclosures, some saw the PR value of delaying foreclosures a few months
Foreclosures have been ramping up as we head into the peak sales season, which was expected. The real question is how many they have left to process when sales slow down into this fall? I think that backlog, combined with additional build during fall/winter, will be enough to keep the housing market deep into buyers' territory (falling prices, no pressure to sign the day the house is viewed, etc)
"ghostface +1 they never planned to pay off the entire loan. The plan was to sell if they got into trouble "
Oh yeah, these were not people looking to buy for the long term. Even if it was a principal residence, they planned to flip into something bigger and better.
The original recast dates were set arbitrarily, often five years.
The loan can recast sooner if you make neg-am payments and the principle grows to a certain size, often 120% or 130% of the original loan. Many borrowers did not pay attention to this provision because they expected to keep refinancing every year or so, so the early recast is a surprise.
Somebody correct me if I'm wrong - this is from memory back when Tanta explained it all.
On the subject of delayed consequences: I've read two forecasts by people I really respect in the last couple days (Russell Napier and Andy Xie) that predict we will have a little upswing (Xie refers specifically to people trying to refloat bubbles, EM, Commodities, etc.) and then a small bout of inflation will force up the Treasury bond rate and then the $hit will really hit the fan. Napier sees the "recovery" lasting two years.
This is why I think oil is really key here - it will act just like rising interest rates.
If the kind of increases we've seen recently continue things will get nasty very quickly and the Fed will basically be powerless.
Everybody is really optimistic right now, but if an inflation panic materializes it could open the gates to a darker hell then anybody is expecting.
Inflation hides problems; it does not make them go away.
If the problems are entirely perceptual then inflation has a chance of solving them. If the problems are more material...
Also wanted to add that many people (prudent at the time?) emptied their bank accounts and put into a house because they thought of it as way to hold wealth. After all home prices were increasing 10% a year in some places.
Some day people may stop considering housing to be an investment or something that can be traded. Housing is a very illiquid market. The best that people should hope for is that the house's value keeps pace with inflation.
"I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness."
$3 a dollar gas is going to be interesting.
and then $4 a gallon gas.
though, of course, BHO could always open the SPR to flood the market, and/or subsidize gas prices a la Chavez.
i swear they think they have invented a magic printing press - just print more dollars and things will be fine.
Problem is, it is not just oil. There is PM, wheat, corn, just about every commodity is going up.
"The loan can recast sooner if you make neg-am payments and the principle grows to a certain size, often 120% or 130% of the original loan."
Most were at 115, some were at 110, some at 125, but most were 115.
There have been a few who hit that cap, especially those whose min payment amortized over 40 years, and/or had a high margin. Like you said, they didn't pay attention to any of that, just the min payment.
Is it really possible for the Fed to go on buying mortgages at 4.25% AND buying TNX at say, 6% (to pervent it from running to 9%) ? At what point does the not-so-stealth financials bailout of all those loans become a problem that Congress needs to address ? I mean, independence is 1 thing but reckless wasting of USG $$$$ to benefit some equity holders is another matter altogether.
"I don't mind the rally. What I do mind is a rally lead by by equities with shitty fundamentals.Now, people will eventually realize that reduction in write downs in the financial sector does not mean those firms will continuously post "profits" anytime soon. So the "low grade" equities will return to valuations where they belong."
"I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness."
$3 a dollar gas is going to be interesting.
and then $4 a gallon gas.
Yeah, last month consumer spending fell and so far this month the weekly chain store sales don't really show any kind of consumer rebound.
Now add a surge in gas prices to that?
Asset inflation doesn't help if it doesn't get to the consumer, in fact it might be quite harmful if it is concentrated in commodities. It's not inconceivable that the "new bull market" might end up being a bad thing.
"I don't mind the rally. What I do mind is a rally lead by by equities with shitty fundamentals.Now, people will eventually realize that reduction in write downs in the financial sector does not mean those firms will continuously post "profits" anytime soon. So the "low grade" equities will return to valuations where they belong."
The real question is whether there really is a rally or not:
For example, price stocks in terms of barrels of oil. Do you still have a rally or is it really a collapse in the value of the dollar?
"Everybody is really optimistic right now, but if an inflation panic materializes it could open the gates to a darker hell then anybody is expecting."
ac, i totally agree. the economy is fundamentally broken, and pouring money on it won't help.
to what extent is inflation itself a monetary problem, and to what extent is it expectations driven? just the expectation of inflation can be inflationary, i think.
the result could be bad. I guess BB feels the Argentina model is better than reliving the GD.
Housing has disconnected from commodity price inflation and just about every other inflation measure. If you want to buy a home to be protected from inflation stay away.
ac (profile) wrote on Fri, 5/8/2009 - 4:34 pm Not so much talk about bear market rallies these days I notice.
As recently as a couple days ago I heard several commentators cautioning that it looks like a bear rally. They point to the lack of volume, plus the fact that crap stocks (homebuilders, financials, retailers) were way out front in the rally. Also, too far too fast (with no pullbacks) to look like the beginning of a true bull
"For example, price stocks in terms of barrels of oil. Do you still have a rally or is it really a collapse in the value of the dollar?"
ac, agree with you again. as I have said before, the price changes in the past few weeks have been incredibly regressive, hurting those who can least afford to be hurt.
basically BB tried to crush savers to the benefit of borrowers, but that is going to snap back like crazy.
I agree this market has moved to fast. The true bottom will have about the same percentage move but must make that move over 6 months at least IMO. Plus all stocks have to be involved. Large cap consumers have largely been left out.
From a real-world perspective, there are economic consequences for so much money being pumped into garbage stocks or near-bankrupt zombies like FITB, SPG and junk like AXL.
Even with Ben's printing press running full speed, capital is not infinite, and the huge money flows into junk stocks represents capital that isn't available to companies with healthy earnings, low debt and an actual possibility of growth.
This is the same "zombie" problem that Japan has been struggling with for years. It really is depressing knowing that we are living through the same exact policy ineptitude. At least the Japanese had the excuse of being first.
Anyone who thinks this is the bottom look at this link. This is a corner of Victorville and REOs only. Easily $60 million in losses. The other 10,000 houses are surely on the banks' books for an easy half billion too much.
If global economic data is worse than expected, there is still more than enough automatic skyjack-the-USD-to-the-moon mechanisms. Sure, it's less on an absolute basis than Sept '08, but global trade is down 20-40% so it will be able to have the same impact. All this gold/oil/commodities interest right now is premature.
"Im getting a creepy sense of foreboding lately from the comments. It's like all this green shooty goodness is going to end very badly."
What I am wondering is when the govt starts talking down the economy again. I am sure they can see the euphoria is going to lead to some very bad dislocations in the economy, i.e. increases in commodities prices and inflation expectations.
again, i don;t understand the stock market, nor do i invest in the broad market, but my sense is that part of the rally was short covering, and some was inflation-driven - i know people i have talked to are frightened of inflation, they fear the 70s more than they do the 30s, the 30s is something that happened in black and white and could never happen again, but the 70s happened relatively recently. and they think that stocks are a good way to combat inflation.
the rise in commodities prices along with the rally has only reinforced that connection in their minds.
"Large cap consumers have largely been left out. "
I noticed that. To the extent I look at stocks at all, it is for companies that actually make stuff and pay a dividend. And those have moved a bit, but not much at all since April 1. Very bizarre.
And I have noticed a lot of really crap stocks, companies that are basically dead, moving 400% from under $1 to under $5.
Seems to support the short covering thesis, I doubt a lot of people piled into shorting Kraft, but MBIA I am sure had a huge short interest.
Look at it this way,
Did tech lead the way out of the 2001 bubble?
Did Japan lead the way out of 1988?
Did consumer staples lead the way out of the 1970s?
Did the bond market lead the way of the 1950s?
I have very little personal knowledge of these references, so feel free to fill in the blanks for me or correct whatever I wrote.
The point is, AIG is not going to lead the way out of this crash and right now AIG is leading the way
I would agree with that assesment GhostFaceInvesta.
deep pocket money desires to descibe the recovery story with investment dollahs. They have large CD's maturing and 2.5% return on "money" just does not "feel" right.
butt stupid dollars are coming into the equity markets as the risk takers "equitize", rally continues
Going OT onto the census, are they already hiring enumerators?
I once had that gig, had the good fortune to get assigned a housing development that was basically completely empty. The work rate was 3 houses every two hours, I had 200+ or so where I left notes at the house, returned the following day, then 3 days later to see if the note was replied to. Total responses: 3
Total amount of work: 10 hours, including the commute
The paperwork needed to be done anyway, so I did that at home. total work: 5 hours
Told them it took a lot longer(even "working" overtime where I got time and a half ), did this for a month while I goofed off, still blew out the quota by a mile, to the point that 6 months after my gig ended I was still getting bonus checks. All for $450 a week take home. That was 20 years ago, nowadays that'd be closer to $1200. There's a lot of empty subdivisions in AZ, CA. Could milk that all summer.
They then placed me in the regional HQ, gave me a raise and I worked my ass off to the point that the other folks were getting pissed. At least this go round payrolls will be automated.
Hmmm in 2010 U3 unemployment will > 10%, U6> 20% coupled with the ongoing financial stress from the mortgage resets and madness ( which continues through at least 2012 ) with a roaring inflation going because other countries will be buying less and less of T notes and BB would have by then printed US $ like no tomorrow.
Ghostface: . and they think that stocks are a good way to combat inflation.
If so, they could be in for a surprise. Inflation with little or no growth kills earnings. We are nowhere near the beginning of the end. Just the end of the beginning.
Mosquitos: If the Alt-A reset disaster turns out to be worse than the sub prime debacle..... I will be able to hear all those people in LaJolla and Rancho-San-Rancho-Bella-Plaza-Santa-Fuente-San-Rico screaming for guillotines and torches
I bout spewed milky earl grey over the keyboard with that one. Disclosure: from the midwest, and spanish challenged.
This is good chow for the Chicken Little crowd. But the cumulative 200 Billion in Option Arm Mortgage is only 2% of the market and most of these people have already walked away or are dead Mortgagees walking.
I assumed everybody had re-fi'd by now into a loan on the Fed's books.
Interest rate resets are also aligned with IO to Amortizing changes, which could be a problem.
Even CR couldn't hike those peaks.
The real question is.. would you hold on to your 'investment' property if you were badly underwater and financially stressed?
Nemo, not everyone. I think the loan mods are aimed at this group - and that is why handling the 2nd lien had to be clarified.
where is everyone gonna be in the summer of 2012?
CR, thank you for pointing out the difference between reset and recast. Tanta would have worn herself out lately, chastising folks for not making the distinction.
where is everyone gonna be in the summer of 2012?
If FAZ would be nice enough to go to 50?
"Interest rate resets are also aligned with IO to Amortizing changes...."
I'm afraid I don't understand. What do you mean?
Hell, probably here.
That Business Week chart tops out on Sept. 11th.
here is an example:
5% IO, 2.25% margin, 1 year LIBOR.
5% IO rate = $417 per 100K balance.
At reset, rate floats at 1 year LIBOR + margin = 1.78% + 2.25% = 4% roughly.
ARM also amortizes over remaining life of loan (25 years assuming 5-1 hybrid)
PMT on 4% amortizing loan over 25 years = $523
523/417 = 25% increase.
Of course, if LIBOR increases more, things get worse, and it is pretty clear where rates are going (and swap spreads are at very normal levels now, so no relief from spread tightening).
Most Alt As and Jumbos were 5 year hybrids, some 7 years, very few 10 years, some fixed.
Later in life when banks started caring about credit risk, they decoupled the rate reset from the IO period (set the IO period to 10 years), but that wasn't until late 2007/early 2008 in most cases.
Option ARMS are a whole other problem.
Oprah pitches chicken, causes riots.
How much more of a beating are you 3-lettered acronym gamblers anonymous short order cooks going to take before your eggs are fried?
CR wrote: "Resets are not a huge problem with low interest rates, but recasts could be significant.."
This week's 10-Y and 30-Y Treasury action suggests that we might not have those low interest rates for the timeframes shown in those charts.
Those folks who can refi had better do so now. How many will be unable to refi ?
Basically I got 6 paychecks (1 week of training, 5 weeks of work) and that's it.
Heck, that's enough to lease a new car and rent a new condo.
Get busy.
Short, they can't refi right now b/c they are at more than 105% LTV.
"Heck, that's enough to lease a new car and rent a new condo.
Get busy. "
Don't you mean lease a new car and use the car as collateral for a 3.5% down FHA loan to buy a 700k house?
"he stuff this year is acutally just creating, updating, and checking address lists. Canvassing/interviewing acutal people doesn't happen until next year."
Thanks, I was wondering why no one knocked on my door yet.
At least then we have more jobs for people next year!
2 poached dollars and one over easy with a side of old rule credit bubble and for desert, a gold bubble.
fixed it three times/....Im almost CR-tarded.
7pm EDT and nary a failed bank in sight.... Yep - all is well in the garden...
ghostfaceinvestah,
For those of us who like watching train wrecks, please do an example of an Option ARM!!
"here is an example:"
You've created a meaningless hodge-podge in your explanation. Clearly, you don't have an understanding of how these products actually work.
Thanks, CR. There are SO many people trying for a loan modification right now.
Here's what I'd like to see: A graph and analysis of the complete loan modifications, with data that shows us just when those loan mods are set to adjust.
For example, many homeowners are bragging that they got approved for a loan mod that will keep their interest rate at X until a date in the future. Just when will all these loan mods adjust upwards?
"Don't you mean lease a new car and use the car as collateral for a 3.5% down FHA loan to buy a 700k house?"
I bow to the Master.
Obama, hire this man!
ECHO !!!, Echo! echo...ech..ec...
GREEN SHOOTS !!! Shoots.....scores...
Any word from the Jas Lounge?
He gets quiet as a church mouse when he's losing money.
This week's 10-Y and 30-Y Treasury action suggests that we might not have those low interest rates for the timeframes shown in those charts.
Looks like we've gotten to the point where the 10-y rate and mortgage rates are the same thing.
That may really come back to haunt the treasury though if the t-note becomes seen as having the same risk as mortgages.
"You've created a meaningless hodge-podge in your explanation. Clearly, you don't have an understanding of how these products actually work."
I assume you are being facetious?
Also, I should point out that many subprime hyrbids actually had a floor on their rate at the initial rate. Not that subprime is much of an issue anymore, but that was a particularly insidious product twist.
Treasuries are no different than a lifeboat...
If too many people get on board, it's gonna capsize.
jillayne, I recall 5 years for 2nd liens. I'd have to go back and look ... but we might have another problem in 2014!
best wishes
"if the t-note becomes seen as having the same risk as mortgages."
Nice dodge there, ac.
Jas Bot (profile) wrote on Fri 5/8
reply ignore user
I look forward ten and twenty years allocating big money capital, and US treasury STRIPS are the only thing to own, along with Swiss Franks, and gold...
anything else is scam market dope shitbox stupid.
---hows that? didja get yer fix lahde?
Comrade Terry, how about some detailed criticism with that curt statement about ghost's post.
"For example, many homeowners are bragging that they got approved for a loan mod that will keep their interest rate at X until a date in the future. Just when will all these loan mods adjust upwards?"
Most loan mods set the payment at an IO payment at a fixed rate for 5 years.
this weird govt program for mods (where people get DQ, they try to keep them current. etc) is really weird, it is basically a buy-down - the rate steps up every year for five years.
though I doubt your friends are in that camp, not something you would brag about.
Love the charts, thanks for posting them, nice to see the results
The counterpoint: even though the recasts have been pulled forward, the time between initial delinquency and short sale or foreclosure has been growing larger.
The people with option ARMs may have only cared about the monthly payment amount. Even if they could refi into a conventional, the payment would be too much for them, because they'd have to pay principal and interest.
oh, that's pretty!
CR,
I don't understand this last part:
"However there is a difference between the original recast date, and the actual recast date - because negatively amortizing loans hit the recast ceiling earlier than the original forecast."
Was the original date based on the assumption the borrower at least paid the interest each month?
Thanks!
Ken Cooper
Im enjoyig the ignore and edit features...
quick somebody say somehting really funny.
EvilHenryPaulson, yeah, but hasn't the time between delinquency and foreclosure been impacted by the moratorium? I think we are about to see a flood of after the moratorium foreclosures. May will be a very busy foreclosure month ...
best wishes.
OT: Did you know that in Bhutan, instead of GDP they have GDH? Gross Domestic Happiness.
IMO, the underwriting on the pay option ARMs was so horrible that these loans are already in default and probably still being carried on the banks books thanks to the moratorium and banks just not wanting to reveal the truth on there books.
Sadly, too many of these homes have already declined in value and are vacant and deteriorating and/or being vandalized.
Like all inventory you have to move it or it just deteriorates further.
Look for banks to dump properties big time once they realize there are no buyers over the spring and summer.
Bob_in_MA, yeah, the lenders have been "stunned" that a majority of Option ARM borrowers all selected the neg Am option! I'm not sure how they calculated the original recast date, but I know it has been moving forward.
best wishes
From the WSJ$
Banks Won Concessions on Tests
Banks Won Concessions on Tests - WSJ.com
Excerpt:
The Fed ultimately accepted some of the banks' pleas. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.
Gee, I bet folks who invested in those banks based on the "stress test" results are happy to hear about this fact now, after trading has closed for the week. Or was this a generally known fact?
CR are unsecuritized ARMs set to peak at the same time?
On the subject of delayed consequences: I've read two forecasts by people I really respect in the last couple days (Russell Napier and Andy Xie) that predict we will have a little upswing (Xie refers specifically to people trying to refloat bubbles, EM, Commodities, etc.) and then a small bout of inflation will force up the Treasury bond rate and then the $hit will really hit the fan. Napier sees the "recovery" lasting two years.
Xie:
Bulls, not Bears, May End in Tears
Napier:
FT Alphaville » Blog Archive » Napier: Higher yields do not mean normalisation
Quiet on the loan reset, ACTION
Ladies and gentlemen: the story you are about to hear is true. Only the terms have been changed to protect the financial system...
The trail of the embezzlers was dead cold in Los Angeles. We were working the day watch out of financial robbery division. My partner's Ben Romero. The boss is Ed Backstrand, chief of detectives. My name's Friday.
I carry a grudge~
Short Courage
I have not heard anyone who is not sceptical about these results... Of wait there is 90% of the public that believes what Ben Bernanke says
"For those of us who like watching train wrecks, please do an example of an Option ARM!! "
Well, that is really tough, actually. You need a calculator for that, but let me try, I happen to have one...
OK, most Option ARMs are MTA based, have a teaser rate/payment, and a margin over the MTA.
Let's take a typical OA from Jul 2006. Teaser rate 1%, margin over MTA 3%.
The min payment is based on the 1% amortized over the term, say 30 years (though some were 40 years).
The gap between the min payment at the amortized teaser rate, and the IO payment at the fully indexed rate, is the amount of neg am.
The other thing to realize about the min payment is it rises by 7.5% every year (why, I don't know).
Using the MTA path today in the above example, and making only the min payment, the borrower would have neg-amed by 6%.
unfortunately, most OAs were in Florida and SoCal, so that 6% gets added to whatever house price decline you got.
assuming MTA stays flat from here through month 60, the min payment is $430 per 100K at month 60 and 578 in month 61, a 35% increase.
interestingly enough. at today's rates, the neg am has basically stopped, as the min payment is roughly equal to the IO payment. So a 35% increase in payment, with 6% higher loan balance than before, and whatever HPI decline you have had.
the problem is, you have to understand the mindset of the OA borrower. they are not like other borrowers. it is all about cashflow. most of these people refinanced every year to avoid the 7.5% increase. no joke. many of these were at 80LTV with a 10% second. almost all were stated income.
these were the true toxic assets of the mortgage world. no coincidence all the major pushers are dead now.
"The people with option ARMs may have only cared about the monthly payment amount. Even if they could refi into a conventional, the payment would be too much for them, because they'd have to pay principal and interest."
True dat. Sources tell me that, when contacted for a mod, most won't even answer the phone (though of course, maybe they are not even in the property anymore).
If the Alt-A reset disaster turns out to be worse than the sub prime debacle..... I will be able to hear all those people in LaJolla and Rancho-San-Rancho-Bella-Plaza-Santa-Fuente-San-Rico screaming for guillotines and torches
This business week article reads like, "hey, great news, resets aren't a problem after all."
But the problem becomes worse. Borrowers who don't see a reset now because of low rates, "complacency," will not do anything to take care of the problem. Not like most of them could anyway with the negative equity that they have. So the resets that were/are due now don't become a major problem until they are added to the ones set to recast/reset next year, or the year after that while prices are still falling.
And then when rates finally do blow up, and they will, the whole lot of them get reset at once. This May with next May's, This June's with next June's. This looks to me like an even bigger time bomb than when these charts were first produced.
(imagines the robot from Lost In Space flailing it's ARM's)
Danger Will Robinson!
ghostface +1 they never planned to pay off the entire loan. The plan was to sell if they got into trouble
"
"Interest rate resets are also aligned with IO to Amortizing changes...."
I'm afraid I don't understand. What do you mean?
"
5 year hybrid. Interest rate fixed for 5 years. IO payment fixed for five years.
At month 61, rate starts to float, AND borrower has to start paying amortizing payment.
CR, many thanks for the updated charts. If there's to be a problem with the owners of my rental, it'll come with the peak of recasts. So I'm trying to follow this as well as I can.
Not so much talk about bear market rallies these days I notice.
I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness.
" IMO, the underwriting on the pay option ARMs was so horrible that these loans are already in default and probably still being carried on the banks books thanks to the moratorium and banks just not wanting to reveal the truth on there books.
Sadly, too many of these homes have already declined in value and are vacant and deteriorating and/or being vandalized."
You are 100% correct. As I mentioned above, most of those borrowers are not even around, or don't want to be contacted, etc.
Problem is, to do most mods, you need to prove income, employment, etc., and most OA borrowers are either unwilling or unable to do so.
Perhaps because Libor, MTA & D11COF are so low..
I'm moving into very anecdotal territory, but a number of commentators have described properties that are delinquent for more than a year. I think the foreclosure moratoria was somewhat self-serving for the banks as well, and would have mostly some the same in its absence. In short, there will be a flood when the moratoria are lifted but not just because of the moratoria
It's not like there was much immediate difference when the moratoria officially began. Some were betting it all on house prices recovering, some were taking advantage of being able to delay recognition of losses, some were wary of flooding a market with excess supply, some weren't prepared to process so many foreclosures, some saw the PR value of delaying foreclosures a few months
Foreclosures have been ramping up as we head into the peak sales season, which was expected. The real question is how many they have left to process when sales slow down into this fall? I think that backlog, combined with additional build during fall/winter, will be enough to keep the housing market deep into buyers' territory (falling prices, no pressure to sign the day the house is viewed, etc)
"ghostface +1 they never planned to pay off the entire loan. The plan was to sell if they got into trouble "
Oh yeah, these were not people looking to buy for the long term. Even if it was a principal residence, they planned to flip into something bigger and better.
The original recast dates were set arbitrarily, often five years.
The loan can recast sooner if you make neg-am payments and the principle grows to a certain size, often 120% or 130% of the original loan. Many borrowers did not pay attention to this provision because they expected to keep refinancing every year or so, so the early recast is a surprise.
Somebody correct me if I'm wrong - this is from memory back when Tanta explained it all.
Rancho-San-Rancho-Bella-Plaza-Santa-Fuente-San-Rico
is that near the Delmar pony show and ponzi track?
On the subject of delayed consequences: I've read two forecasts by people I really respect in the last couple days (Russell Napier and Andy Xie) that predict we will have a little upswing (Xie refers specifically to people trying to refloat bubbles, EM, Commodities, etc.) and then a small bout of inflation will force up the Treasury bond rate and then the $hit will really hit the fan. Napier sees the "recovery" lasting two years.
This is why I think oil is really key here - it will act just like rising interest rates.
If the kind of increases we've seen recently continue things will get nasty very quickly and the Fed will basically be powerless.
Everybody is really optimistic right now, but if an inflation panic materializes it could open the gates to a darker hell then anybody is expecting.
Inflation hides problems; it does not make them go away.
If the problems are entirely perceptual then inflation has a chance of solving them. If the problems are more material...
Well, you ain't seen nothin' yet.
Ghostface Agree
Also wanted to add that many people (prudent at the time?) emptied their bank accounts and put into a house because they thought of it as way to hold wealth. After all home prices were increasing 10% a year in some places.
Some day people may stop considering housing to be an investment or something that can be traded. Housing is a very illiquid market. The best that people should hope for is that the house's value keeps pace with inflation.
"I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness."
$3 a dollar gas is going to be interesting.
and then $4 a gallon gas.
though, of course, BHO could always open the SPR to flood the market, and/or subsidize gas prices a la Chavez.
i swear they think they have invented a magic printing press - just print more dollars and things will be fine.
Problem is, it is not just oil. There is PM, wheat, corn, just about every commodity is going up.
"The loan can recast sooner if you make neg-am payments and the principle grows to a certain size, often 120% or 130% of the original loan."
Most were at 115, some were at 110, some at 125, but most were 115.
There have been a few who hit that cap, especially those whose min payment amortized over 40 years, and/or had a high margin. Like you said, they didn't pay attention to any of that, just the min payment.
Is it really possible for the Fed to go on buying mortgages at 4.25% AND buying TNX at say, 6% (to pervent it from running to 9%) ? At what point does the not-so-stealth financials bailout of all those loans become a problem that Congress needs to address ? I mean, independence is 1 thing but reckless wasting of USG $$$$ to benefit some equity holders is another matter altogether.
Comrade de Chaos
"I don't mind the rally. What I do mind is a rally lead by by equities with shitty fundamentals.Now, people will eventually realize that reduction in write downs in the financial sector does not mean those firms will continuously post "profits" anytime soon. So the "low grade" equities will return to valuations where they belong."
I see the market like this too.
"I might be more optimistic but I wonder how oil prices shooting up is going to work in an environment where consumer spending is still showing real weakness."
$3 a dollar gas is going to be interesting.
and then $4 a gallon gas.
Yeah, last month consumer spending fell and so far this month the weekly chain store sales don't really show any kind of consumer rebound.
Now add a surge in gas prices to that?
Asset inflation doesn't help if it doesn't get to the consumer, in fact it might be quite harmful if it is concentrated in commodities. It's not inconceivable that the "new bull market" might end up being a bad thing.
albrt, yes, for those that want to really understand, here is Tanta's post: On Option ARMs
best to all
The question is: Who believes the "suprise" reset on the neg-am IO and commodity price inflation would stimulate rent increases?
we have seen this scenario already and it failed.
"is that near the Delmar pony show and ponzi track?"
Nope... up along the the 15 east of Lake Elsinore in foreclosure alley. I'm sure Jim the realtor will have some great you-tubes of the neighborhood
"I don't mind the rally. What I do mind is a rally lead by by equities with shitty fundamentals.Now, people will eventually realize that reduction in write downs in the financial sector does not mean those firms will continuously post "profits" anytime soon. So the "low grade" equities will return to valuations where they belong."
The real question is whether there really is a rally or not:
For example, price stocks in terms of barrels of oil. Do you still have a rally or is it really a collapse in the value of the dollar?
"Everybody is really optimistic right now, but if an inflation panic materializes it could open the gates to a darker hell then anybody is expecting."
ac, i totally agree. the economy is fundamentally broken, and pouring money on it won't help.
to what extent is inflation itself a monetary problem, and to what extent is it expectations driven? just the expectation of inflation can be inflationary, i think.
the result could be bad. I guess BB feels the Argentina model is better than reliving the GD.
Bank Failure
Housing has disconnected from commodity price inflation and just about every other inflation measure. If you want to buy a home to be protected from inflation stay away.
ac (profile) wrote on Fri, 5/8/2009 - 4:34 pm
Not so much talk about bear market rallies these days I notice.
As recently as a couple days ago I heard several commentators cautioning that it looks like a bear rally. They point to the lack of volume, plus the fact that crap stocks (homebuilders, financials, retailers) were way out front in the rally. Also, too far too fast (with no pullbacks) to look like the beginning of a true bull
Little spike in mortgage bond rates.
I'll be watching this and oil prices quite closely.
I bet Mental Ben will be too.
Im getting a creepy sense of foreboding lately from the comments. It's like all this green shooty goodness is going to end very badly.
"For example, price stocks in terms of barrels of oil. Do you still have a rally or is it really a collapse in the value of the dollar?"
ac, agree with you again. as I have said before, the price changes in the past few weeks have been incredibly regressive, hurting those who can least afford to be hurt.
basically BB tried to crush savers to the benefit of borrowers, but that is going to snap back like crazy.
Short courage
I agree this market has moved to fast. The true bottom will have about the same percentage move but must make that move over 6 months at least IMO. Plus all stocks have to be involved. Large cap consumers have largely been left out.
From a real-world perspective, there are economic consequences for so much money being pumped into garbage stocks or near-bankrupt zombies like FITB, SPG and junk like AXL.
Even with Ben's printing press running full speed, capital is not infinite, and the huge money flows into junk stocks represents capital that isn't available to companies with healthy earnings, low debt and an actual possibility of growth.
This is the same "zombie" problem that Japan has been struggling with for years. It really is depressing knowing that we are living through the same exact policy ineptitude. At least the Japanese had the excuse of being first.
Why is Friedman Monaterism running what looks like a stagflationary L-shaped jobless recovery of Bourgeoisie capital?
its a good question for this crowd
its a big pile of shit work....Im not gonna apologize for it.
There is PM, wheat, corn, just about every commodity is going up.
That's because the recession is over.
Back to business as usual. Lever up!
ac, i totally agree. the economy is fundamentally broken, and pouring money on it won't help.
It can help in the short-term, as we've seen now many times: 1927, 1998, 2001...
The question is do markets see through the game this time and price in the damage sooner than later.
Right now oil and treasuries to some extent seem to be saying "we're not buying bubblenomics anymore".
But never underestimate the power of the bubble...
Anyone who thinks this is the bottom look at this link. This is a corner of Victorville and REOs only. Easily $60 million in losses. The other 10,000 houses are surely on the banks' books for an easy half billion too much.
If global economic data is worse than expected, there is still more than enough automatic skyjack-the-USD-to-the-moon mechanisms. Sure, it's less on an absolute basis than Sept '08, but global trade is down 20-40% so it will be able to have the same impact. All this gold/oil/commodities interest right now is premature.
"Im getting a creepy sense of foreboding lately from the comments. It's like all this green shooty goodness is going to end very badly."
What I am wondering is when the govt starts talking down the economy again. I am sure they can see the euphoria is going to lead to some very bad dislocations in the economy, i.e. increases in commodities prices and inflation expectations.
again, i don;t understand the stock market, nor do i invest in the broad market, but my sense is that part of the rally was short covering, and some was inflation-driven - i know people i have talked to are frightened of inflation, they fear the 70s more than they do the 30s, the 30s is something that happened in black and white and could never happen again, but the 70s happened relatively recently. and they think that stocks are a good way to combat inflation.
the rise in commodities prices along with the rally has only reinforced that connection in their minds.
ROb Dawg
+1 for the link. DMM short housing case shiller starts trading Monday I think.
woops
"Large cap consumers have largely been left out. "
I noticed that. To the extent I look at stocks at all, it is for companies that actually make stuff and pay a dividend. And those have moved a bit, but not much at all since April 1. Very bizarre.
And I have noticed a lot of really crap stocks, companies that are basically dead, moving 400% from under $1 to under $5.
Seems to support the short covering thesis, I doubt a lot of people piled into shorting Kraft, but MBIA I am sure had a huge short interest.
GDD9000 (profile) wrote on Fri, 5/8/2009 - 6:55 pm
Im getting a creepy sense of foreboding lately from the comments. It's like all this green shooty goodness is going to end very badly.
I feel a tremor in the Farce.
Look at it this way,
Did tech lead the way out of the 2001 bubble?
Did Japan lead the way out of 1988?
Did consumer staples lead the way out of the 1970s?
Did the bond market lead the way of the 1950s?
I have very little personal knowledge of these references, so feel free to fill in the blanks for me or correct whatever I wrote.
The point is, AIG is not going to lead the way out of this crash and right now AIG is leading the way
Farcical financials force feverish fantasies
http://www.macromarkets.com/macroshares/documents/dmm_prospectus.pdf
This is for the Case-shiller short.
I would agree with that assesment GhostFaceInvesta.
deep pocket money desires to descibe the recovery story with investment dollahs. They have large CD's maturing and 2.5% return on "money" just does not "feel" right.
butt stupid dollars are coming into the equity markets as the risk takers "equitize", rally continues
Going OT onto the census, are they already hiring enumerators?
I once had that gig, had the good fortune to get assigned a housing development that was basically completely empty. The work rate was 3 houses every two hours, I had 200+ or so where I left notes at the house, returned the following day, then 3 days later to see if the note was replied to. Total responses: 3
Total amount of work: 10 hours, including the commute
The paperwork needed to be done anyway, so I did that at home. total work: 5 hours
Told them it took a lot longer(even "working" overtime where I got time and a half ), did this for a month while I goofed off, still blew out the quota by a mile, to the point that 6 months after my gig ended I was still getting bonus checks. All for $450 a week take home. That was 20 years ago, nowadays that'd be closer to $1200. There's a lot of empty subdivisions in AZ, CA. Could milk that all summer.
They then placed me in the regional HQ, gave me a raise and I worked my ass off to the point that the other folks were getting pissed. At least this go round payrolls will be automated.
Hmmm in 2010 U3 unemployment will > 10%, U6> 20% coupled with the ongoing financial stress from the mortgage resets and madness ( which continues through at least 2012 ) with a roaring inflation going because other countries will be buying less and less of T notes and BB would have by then printed US $ like no tomorrow.
Fun !
Meanwhile, here at the bank-failure watch center.....
chirp.....chirp.....chirp....
Ghostface: . and they think that stocks are a good way to combat inflation.
If so, they could be in for a surprise. Inflation with little or no growth kills earnings. We are nowhere near the beginning of the end. Just the end of the beginning.
It's okay. It's late on BFF. Knurd 'em if you got 'em. And the smoking lamp is lit. Roll 'em if you got 'em too.
This rally is going to drift drift drift upwards then
SLAM
Mosquitos: If the Alt-A reset disaster turns out to be worse than the sub prime debacle..... I will be able to hear all those people in LaJolla and Rancho-San-Rancho-Bella-Plaza-Santa-Fuente-San-Rico screaming for guillotines and torches
I bout spewed milky earl grey over the keyboard with that one. Disclosure: from the midwest, and spanish challenged.
This is good chow for the Chicken Little crowd. But the cumulative 200 Billion in Option Arm Mortgage is only 2% of the market and most of these people have already walked away or are dead Mortgagees walking.
Where's CR ? We have a (un)sound Bank in the West, well, ok WestSound Bank failing and no post about it YET !
Link
-K
ZeroHedge bagged Bremerton first, CR
Zero Hedge
Thanks ac. "For example, price stocks in terms of barrels of oil. Do you still have a rally or is it really a collapse in the value of the dollar?
I'm not seeing this stated as clearly anywhere else.