"Option" Mortgages To Explode, Officials Warn

Reuters ^ | 9-17-2009 | Lisa Lambert

[blam]

WASHINGTON (Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

[dalebert]

yup wheres the money?

[mockingbyrd]

AGAIN? You mean everyone who couldn’t afford their ARMS before still can’t? Even after renegotiating?

[blam]

Wall Street Risks Red October As Rebound Looks Frothy

Fri Sep 18, 2009 3:00pm EDT
By Pedro Nicolaci da Costa - Analysis

NEW YORK (Reuters) - Financial markets are off to the races and Wall Street has all but declared victory.

A surge in prices for both risky and safe assets is alarming some analysts who say emergency rescue measures that helped markets rebound may be setting them up for a new fall.

But most institutional investors just aren't listening.

[snip]

[perfect_rovian_storm]

Amazing, isn’t it?

[Nervous Tick]

>> Miller said option-ARMs were discussed at Tuesday’s meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

I wonder if they discussed themselves? The Feds run the biggest mortgage scams of anyone, by far, and these jokers are the prime movers.

[spyone]

$1500 per month to 3500 per month. Sure. I can do it if I just cut back.

[FlingWingFlyer]

Yo! America! How’s that hopey changey thing workin’ out for ya?

[Alex Murphy]

Ping for later

[blam]

Debt Deflation Laboratory Of The Baltics

Property prices in Estonia's Hanseatic capital of Tallinn have fallen by 59pc from their peak in the Baltic boom, a remarkable state of affairs for an EU country nestled against Russia on the most dangerous fault line in Europe.

By Ambrose Evans-Pritchard
Published: 6:52PM BST 20 Sep 2009

Cost per sq.m has dropped from €1,611 (£1,455) to €669 since April 2007, according to Ober-Haus Real Estate Advisors. Swedbank says up to 30pc of its mortgages in Estonia are in negative equity. Recent loans are in euros – not the local kroon.

Professor Ülo Ennuste from Tallinn University says the private net wealth of Estonia's people has fallen below zero. I know of no other country in the world where this has occurred, though Latvia may be deeper in hock. Estonia's foreign debt is 116pc of GDP, second highest in Eastern Europe.

[snip]

[Bean Counter]

Here in SW Washington, the unemployment rate is 13.9%, and the longer that continues, there will be more defaults on mortgages of all kinds. Our real unemployment rate here has got to be well in excess of 20%, and if it gets too much higher we’ll be approaching anarchy.

Millions of people’s unemployment is about to expire unless the Federal Government borrows even more money from the Communist Chinese. The 12 Trillion pound Gorilla in the room is what happens when the Red Chinese decide to divest themselves of the Dollar, along with the Japanese, South Korea, Taiwan, Russia, Poland, et al...

For now you can still buy a 50 pound bag of US grown white long grain rice for about $20, and an airtight 6 gallon tub to keep it in for about the same. You can’t eat that $40 worth of gold...

[ottbmare]

One more step on the staircase that leads to the basement. We are going in the toilet, kids.

[GOPJ]

Yo! America! How’s that hopey changey thing workin’ out for ya?

LOL

[The Magical Mischief Tour]

BOHICA...

[Secret Agent Man]

TARP II.

Even though 90-ish percent of TARP 1 funds haven’t been used.

It will be a revolting development.

[Extremely Extreme Extremist]

The market is going to crash in October and it’ll make the 1987 crash look like a picnic.

[hiredhand]

Ping!

[blam]

Strategic Default Data Suggests Foreclosure Prevention Tactics Useless

An interesting report in the Los Angeles Times shows that a person with super-prime credit scores is more likely to walk away from an underwater mortgage than a person with a subprime credit rating.(OOPS)

Inquiring minds are reading Homeowners who 'strategically default' on loans a growing problem.

Who is more likely to walk away from a house and a mortgage -- a person with super-prime credit scores or someone with lower scores?

[snip]

[ChocChipCookie]

We have been discussing whether or not to try and sell our home and get ready for really, really hard times. We have a great rate on a 30 year mortgage, and have never come close to not being able to make our house payment. What we’re worried about is not being ABLE to sell our home if our incomes should bottom out in a devastated economy, a ruined credit rating, and still having to walk away from our home and the equity in it.

It’s one thing to say, “everyone will be in the same boat,” but that won’t stop creditors and the IRS.

[staytrue]

An option arm is where you decide what you want to pay and if it is less than the interest, the principle gets bigger. Then at some later date, you pay a traditional amount on the new balance/principle.

from the article:

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan’s principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan’s interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying,

[blam]

The Asian markets are mixed tonight, half up and half down. See here.

[Vince Ferrer]

This has been forcasted as far back as 2007, but from more recent data, many of these mortgage holders didn't even last long enough to get to the mortgage reset, and are already in the forclosure statistics. This had people thinking that the wave will not be that bad. So why all these stories now warning of the option arm wave?

I am more concerned about the commercial mortgages.

[NVDave]

This is yet another datapoint that shows how silly these bank models of loan performance are.

NB: Some months back, BofA and others started withdrawing predictions of their bad loan losses and necessary allowances for bad loans in relation to unemployment. The reason stated was that their models didn’t cover unemployment rates over 10%. Since the start of computer models in lending, we’ve had unemployment over 10% only once, for one quarter, the interest rates on new paper written during that time was sky-high (and a pretty good deal for the bankers at that time) and the subsequent recovery was rather robust. Since then, we’ve never seen 10%+ U-3 unemployment.

Now that unemployment is going up to 10% and (it would appear likely) beyond, their models have no grip on what to kick out for default prognostication. Bankers also did NOT expext that the rate of default on prime paper would overtake the crap paper so quickly - but it has.

Suddenly, FICO scores are worthless. They predict nothing substantive about borrower behavior where the underwater mortgage is forcing people to choose “Default and move somewhere else to get work, or stay here, eventually go into default because we cannot get jobs and hold our credit rating for six months more?”

Because someone who owns a house that is upside-down on the note now has a choice of “crap now, or crap later” if the house is the only thing preventing them from moving to take a job. Might as well embrace the suck, default on the note ASAP and go get that job.

[jiggyboy]

These were 5/1 ARMS bought at the top of the bubble in 2004-2006.

[NVDave]

Because the popular press has the IQ of a hamster and the attention span of a goldfish.

The Option-ARM meltdown was predicted to start at the earliest by the end of this year, but really get going in the fall of 2010. Not now. However, borrower behavior of neg-am’ing the loan so hard (ie, they’ve made only the absolute minimum of payment on the note) has been so widespread, quite a few of these option-ARMs are starting to “recast” a year sooner than previously thought.

There are two events on an option-ARM that cause payments to go up: a rate reset, and a recast. The fact that the loans were made at nearly 100% LTV, and then the borrowers paid only the minimum has pushed the loans forward to a premature recast event, because even if the house had not depreciated in value, the borrowers have neg-am’ed so much principle that they’re now at 115 to 125% LTV. That triggers a re-cast event, even if it comes before the rate adjustment date.

[Lmo56]

Sub-Prime and Option-ARM mortgages were made BEFORE re-negotiation ...

Sub-prime mortgages were the first type of financial instruments that were created - basically allowing non-qualified individuals to get mortgages at low TEASER interest rates - but they had to pay the FULL principle and interest at the current prevailing rates.

HOWEVER, those teaser interest rates had automatic resets built in - so the monthly payment would go up over time (often at 3, 5, and 7 years). At some point a lot of owners could NOT service the debt.

Option-ARMs are WORSE - allowing people to make an interest-only payment or a below interest minimum payment at low TEASER interest rates. This would cause the principle on the loan to remain the same or even INCREASE. These mortgages ALSO had automatic resets in interest rates AND a reset in the minimum payment.

That is, at some point, the FULL principle AND the new interest rate(s) had to be paid. Glub, glub, glub - suddenly underwater ...

I call Option-ARM loans “Wimpy” loans - “For a hamburger today, I will gladly pay you Friday” ...

[TheWriterTX]

I've been telling people about this for a while. I told folks we are in the eye of the storm, and the back-end is going to be worse.

Since my industry is directly tied to the housing market, I expect to be job hunting very shortly.

These alarming forecasts also do not take into consideration the growing number of Americans who lost their jobs in the first wave, and have been depleting their savings and retirement funds while looking for work.

That's going to be a very hard crash.

Thank God my husband and I are paying off the last of our debt this month, with only our low mortgage to meet.

[TheWriterTX]

"Because the popular press has the IQ of a hamster and the attention span of a goldfish"

Hey, hey now! That's an insult to hamsters!

[Vince Ferrer]

Option ARMs: Good News, Bad News

[Vince Ferrer]

"Bloomberg reports that the wave of option adjustable-rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures over the next couple of years, will be smaller than feared. That’s because the loans are going into default sooner than anticipated, with many never reaching a recast event."

Option ARM threat already here?

[blam]

Moody's Bearish On Housing Recovery

Analysts say it will take more than 10 years to recapture peak home prices

By John Spence, MarketWatch BOSTON (MarketWatch) -- Moody's Investors Service threw cold water on optimistic projections of a V-shaped recovery in the battered U.S. housing market, predicting it could take more than 10 years to get back to boom-level prices.

"For many reasons, the rebound will be disproportionately small compared to the decline," Moody's said this week in its latest outlook on the residential market. "It will take more than a decade to completely recover from the 40% peak-to-trough decline in national home prices."

The housing market is in the third year of the current downturn, one of the worst corrections in U.S. history as a result of the economic recession and the mortgage industry nearly grinding to a halt during the credit crunch.

[snip]

[razorback-bert]

No worries, Turbo-Tax Tim has a plan.

[Fee]

Mortgages will eventually recover. However the banks are another story. Many of these mortgages were bundled and sold to other investors who used leveraged funds to buy them and derivatives to insure them against possible loss. Problem is Moody was suppose to review the bank data on the loans before they can rate them. Moody was told by the banks that the loan data is not available for their analysts and that Moody will give these securities a good rating or in the future the banks will not hire Moody to rate future products. Moody relented and instructed their analysts to come up with a method to satisfy the customer (banks). Many analysts were threatened (many are now witnesses in lawsuits against Moody) and unfortunately for Moody many of the supervisors sent the threat via email. The analysts have kept a copy of the emails because they knew their ratings will under scrutiny when the securities collapse. The losses caused by improperly rated AAA mortgage backed securities has done more damage to the US financial system that it will decades to recover. We may end the 21st Century as the second strongest nation due to this financial wound inflicted upon us by Wall Street bankers and financial services thru their reckless behavior and fraud.

[DB]

I think it is worse than that.

All of Obama’s policies are going to result in high inflation and therefore rising interest rates. When rates start to rise significantly many, many more mortgages that are adjustable rate are going to become unserviceable. That's going to start a whole new round of bank failures and personal bankruptcies.

[bruinbirdman]

The original crash was blamed on bad mortgages and all the derivative toxic waste.

I know that on this forum, resets were emphasized. They were just about the basis for a W recovery at the least.

This equity surge will last just about until the ARMs reset and CRE hit the fan.

yitbos

[Lmo56]

This equity surge will last just about until the ARMs reset and CRE hit the fan.

***

CRE - Commercial Real Estate ???

[bruinbirdman]

yup

[VanShuyten]

But our president has said that all those with questionable mortgages will have an opportunity to have a second chance, and that Fannie Mae or Freddie Mac or Acorn will help them out.

Seriously now, do you think the big 0 is going to let this next wave of defaults occur? FM and FMc already own or control a huge percent of the mortgage market. This is an opportunity to control more.

[NVDave]

The number of “ruthless defaults” occurring in the prime tranche, by people with high to nearly spotless FICO scores, shows that loan “work out” programs are going to be worthless to stem the tide. These “ruthless” defaults are happening because it is the least worst of the possible alternatives open to the homeowners. Their FICO scores shows that they’ve been responsible borrowers for quite some time.

Fannie/Freddie aren’t in much position to help out here. If it were not for the Fed’s QE program, mortgage rates would have been higher since March than they have been — by at least 75bp, perhaps more. FHA is next on deck for rising defaults and problems. Effectively, the government IS the mortgage market just now, but they cannot keep depending on the Fed’s QE program to keep rates low. Everyone in the commercial paper market knows that delinquencies are still going up in many areas, and into higher quality tranches, so nothing is “AAA” safe anymore.

As unemployment goes up, there’s little possibility that defaults won’t go up.

The decision doesn’t rest with Obama or Congress now. It rests with the Fed. Does the Fed extend their QE program? If so, for how long and how many more hundreds of billions? Can they afford to extend it? Will the Fed take losses on their RMBS portfolio as defaults continue to go up?

All very pertinent questions without many public answers.

[cherry]

today I bought 75# of sugar for just under $27 dollars.....

[cherry]

if you sold, where would you live?....what would you do with your "profit"?

we have to face the fact that our govt has so intruded our lives that I don't even trust our savings accounts.....and how much money can one keep at home?....they could change the currency in an instant if they wanted too....

[dr_lew]

I call Option-ARM loans “Wimpy” loans - “For a hamburger today, I will gladly pay you Friday” ...

Please! "I will gladly repay you Tuesday, for a hamburger today."

[Soul of the South]

In south Florida many who can easily afford to pay their mortgages are technically in default as a result of the precipitous drop in housing values since the top of the boom.

I was talking to the retired 72 year old owner of a Florida condo and home in the mid-west. His Ohio home is fully paid for and his condo, purchased at the height of the boom for $800,000, now has a $700,000 mortgage and a market value of about $450,000. He told me he had stopped paying the mortgage and condo fees, even though he could easily make the payments, with the tacit understanding of the bank.

The simple facts. It likely be beyond his lifetime before prices appreciate to where the value of the property exceeds the mortgage again. If the bank forecloses, the bank owns the property and must pay the carry charges on the property (taxes, condo fees, utilities, maintenance) until the unit can be sold which in today’s market could be years. The annual carry costs on this condo are about $20,000 per year. Plus the bank must take a charge on the bad loan at the time it forecloses. Now it is simply on the banks books as a nonperforming loan.

The alternative is for the bank to allow him to continue “owning” the condo. He pays the $6000 annual taxes and utilities. He is not paying his homeowner fees and mortgage. He lives in the condo 6 months a year to maintain his Florida residency (Florida has no state income tax) and goes back to Ohio the rest of the year. The building’s condo association is third in line to collect in a foreclosure (behind the bank and the community master association) so it cannot force foreclosure on its own and in the event of a bank foreclosure is entitled to only 3 month back fees while in a sale it stand to gain all back dues.

He will continue to use the condo until he dies or the bank actually forecloses. Whether the bank forecloses in his lifetime, or when his estate is settled, the mortgage is secured only by the property so his other assets can’t be touched. He, or his estate, loses only the $100,000 difference between the purchase price and the current value of the loan. Were he to sell the home today, he would have to pay off the loan resulting in a total loss of $350,000.

The only way he loses in this situation is if he ever needs to take out another mortgage since by going in default he has ruined his credit rating. Given his age and the fact he has one fully paid for home, it is highly unlikely he will need credit again in his lifetime.

Since he began telling the story to his neighbors, 3 other elderly owners with underwater properties have gone this route and the condo association is looking at raising dues on the rest of us so expenses can be covered in spite of the rising unpaid dues. Undoubtedly there are many other instances of this “arrangement” with the banks are occurring in Florida and around the country.

These affluent retirees are solid conservatives who made their money on small businesses they built and sold to fund their retirement. In conversation they complain about Obama’s socialist policies, tax cheats, union and welfare queens. Yet they perceive no ethical issue with their own gaming of the system or the unloading of their obligation for the common expenses of the condominium building on their neighbors. They justify their actions as “legal” and economically prudent. They enjoy the tax advantages of Florida residency while contributing to the economic meltdown of the state’s economy.

Unfortunately the moral bankruptcy of the nation extends to even the most politically conservative and productive citizens. The absence of personal responsibility is not limited to Democrats and liberals.

[GOPJ]

ping

[investigateworld]

Good post. I didn’t know things were so bad in FL.

[GOPJ]

Sorry - but I don’t see these people as “conservative”... sounds like they got “me,me, me advice” from ACORN

[Lurker]

They're not only going Galt, they're MonkeyWrenching the entire system.

Good on 'em. The sooner this whole house of cards collapses the sooner we can start rebuilding.