Option ARM Delinquencies Up Huge
A: Funny, doesn't it just seem like 2008, the year of the ARM reset, the year that started with a 10% correction in equity markets hasn't heard much about rising defaults from homeowners recently? It seems like it just went away and global stock selloffs & bond insurer bailout plans took center stage! Are we out of the woods? Unfortunately no. As I've said over and over on this site and what has got some to think I am a doom & gloom blogger, I call it realism, this is NOT a subprime problem; its a complete mortgage/debt problem! Here is the latest from FirstFed.
Via Calculated Risk (source HousingWire.com):
Delinquencies and non-accruals - non-accruals refer to severe delinquencies 90+ days in arrears or in foreclosure - have been skyrocketing at FirstFed. The bank reported that single-family non-accruals jumped to $179.7 million in Q4, up a stunning 116 percent from the third quarter alone. Delinquencies less than 90 days among single family loans rose to $236.7 million by the end of Q4 - that’s 231 percent over the $71.5 million recorded just one quarter earlier.But FirstFed is based in California, this doesn't affect Manhattan, right Noah? Right, but it does reflect the severity of the housing slump outside Manhattan, and that affects the securities derived from home loans outside subprime! We must be aware that subprime was not the only loan type to be securitized that got the word itself listed as "2007 Word of The Year". We also have option ARM's (link shows you all posts where I mentioned option ARM's), heloc's, cosi, cofi, neg amortizing loans, credit cards, auto loans, commercial real estate loans, etc..When those defaults rise, the secondary markets where the securities are traded seizes up just like it did with subprime, and the losses of the toxic waste held on the books of banks/brokerages pile up! Facts people. Reality. If you don't like, this site is not for you. It is this indirect impact that could ultimately hit home, as if this contagion spreads to other debt classes it will result in more write downs, a prolonged economic slowdown & job losses, falling stock prices, and a tighter lending environment. That is where it could hit us.
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.
(To make it clear: that’s $1.9 billion in forced resets against just $128.1 million currently reserved for loan losses.)
Just because we don't contribute, doesn't make us immune to a fall in buyer confidence; and that's the key to a health housing market! Inventory is a very close second. Here is some more news from around the net regarding this issue.
According to Bloomberg:
"There's going to be more issues with regard to writedowns," said Peter Sorrentino, who helps oversee $12 billion as senior portfolio manager at Huntington Asset Management in Cincinnati. "We've got more classes of debt securities that are going to become questionable as this consumer malaise drags on for a while."According to Daily Reckoning:
AMBAC, MBIA and a few other bond insurers have guaranteed some US$2 trillion in assets. We are not suggesting that all those assets would suddenly be in jeopardy. But the truth is, off in the distance, well behind the front lines, there is another wave of dodgy U.S. mortgage products massing. These option-ARMs are threatening billions more in losses for the banks that made the loans and the investors that bought them. They made their first tentative attack yesterday.Just keep an eye on default levels for option ARM's, cosi/cofi, HELOC's, credit cards, auto loans, etc.. in the first half of 2008! I'm hoping that things stabilize, I really do, but the trend out there and the state of the national housing market as a whole is not on our side. So, this must be on our radar when discussing how long this credit crisis may last.
"The no-worries lending that inflated the housing bubble is resulting in a flood of soured option-ARM loans, adjustable-rate mortgages that allow borrowers to pay so little every month that their loan balances rise rather than fall, sometimes sharply," reports Scott Reckard in the L.A. Times. The trouble here is that this genre of bad loans came into existence in 2006 and 2007, at the peak of housing bubble.
Last in, first to default, you might say. "Numbers from industry trackers suggest that these borrowers, most of whom boast respectable and often top-tier credit scores and appear to have substantial incomes and home equity, are starting to create a second tide of defaults for lenders swamped by the meltdown in subprime loans made to people with bad credit or overstretched finances."
Posted by anonymous
Sat Jan 26th, 2008 10:15 AM
yeah baby time for the collapse to come. I can't wait to scoop up some great deals in Manhattan. Ya ba daba doo
Posted by anonymous
Sat Jan 26th, 2008 10:58 AM
me too I love this stuff. I can't wait to do some discount buying. Going to buy my wife and I a nice place for pennies on the dollar in Manhattan. Ride em cowboy!
Posted by Noah
Sat Jan 26th, 2008 06:52 PM
well this doesnt mean NYC will collapse! Its more some updates on the national housing market and the macro fundamentals of rising defaults that are leading to so much distress in the banks/brokerages and wall street, and the overall US/Global economies.
How it may trickle down to NYC re is still yet to be seen!
Posted by anonymous
Sat Jan 26th, 2008 07:40 PM
Noah great job. Prices have to come down in Manhattan any idiot should know that. Was reading another site and this Jerk the Juiceman is so clueless. Why do you respond to such dopes as the Juiceman.
Posted by Kyle
Sat Jan 26th, 2008 08:04 PM
Definitely important information. This speaks more to me about our California market and bad loan officers selling a mortgage that was created for high net worth clients to first time homebuyers. The bad loan officers are being weeded out of the business but their work will linger a while longer.
Posted by Anon
Sun Jan 27th, 2008 12:13 AM
All real estate is local and in New York City, local means by blocks. Although Lispenard and Franklin are in Tribeca, there is a big difference between both.
Second, prices on shitty properties are coming down. Anything of any value, of any interest, to any buyer is not coming down.
If you notice, many of the shitty listings that have been on the market for more than 30 days, contine to stay on the market.
Posted by Bobby
Sun Jan 27th, 2008 12:41 PM
"NYC is unique" is not a unique statement of belief at all. Check the internet and other believers fervently believe that Seattle, or SF Bay Area, and many other places are immune from the housing market collapse.
Remains to be seen, but we will know sooner rather than latter.
Posted by Dan
Sun Jan 27th, 2008 03:42 PM
Noah, don't you think that because rates are so low now, when these arms reset, they won't be at much higher rates than when they were issued? They might be at lower rates, no? This whole reseting thing could potentially help real estate valuations. What am I missing?
Posted by Noah
Sun Jan 27th, 2008 03:50 PM
Dan - first off we are talking nationally right and the masses? and we are also assuming that the masses, especially subprime masses, had a higher rate to begin with?
Teaser rates of 7-9%, STILL will adjust higher. Maybe not as high as the 2% cap as LIBOR came down, but it will still adjust higher. It certainly will not adjust lower! Refis certainly may help this situation, but not general resets, as those will adjust higher!
My mom is one, and her rates is going up $500, or 11% of her total payment. Harsh to say the least! It goes up in April. Still much pain to go through. All this stimulus, and injections, and fed cuts, and planned bailouts are coming at a time when we are NOT in a recession.
Ask yourself now: ARE YOU MISSING SOMETHING? How bad is the situation expected to get that all this is being done proactively?
Posted by jeff
Sun Jan 27th, 2008 07:38 PM
Noah,
You make a very good point about questioning what all the "proactive" steps, cutting of rates, infusions of capital etc are telling us about the expectations of pain to come. In reality financial institutions and the government have been asleep at the switch, they are now chasing a ball down hill and are runnig real fast to catch up....it does beg the question are they running fast enough. I also would remidn folks that a large portion of the sub prime ARM's people worry about have defaulted before any reset...its not just the resets that are the issue. It is the corrosive combination of borrowers with no skin (equity) in the game, declines in home values and incomes that never supported the mortgages in the first place. The Fed did a study showing that default rates are directly correlated with home value declines. Additionally, the bad lending included car and other consumer loans as well as credit cards....they are finding people with no equity in their home would rather default on their mortgage than have their car repossesed...they still need to get to work.
Posted by Expat
Mon Jan 28th, 2008 12:39 AM
I have gone from annoyance, schadenfreude, glee, to panic. While those reading and contributing to these kinds of web pages will perhaps finally be happy to buy a house or apartment when the market hits forty to fifty percent of its peak value, the financial repercussions are so massive that the "I told you so" benefits to us in real estate will be largely offset by the "what the F***" factor in everything else.
Sure, I want to buy a pied-a-terre, two bedroom in Manhattan for half a million, but I don't want the financial meltdown that implies. It's not my fault. I did not cause it. Hell, I did not even benefit. but I am sure going to pay the price.
We give out methadone to heroin addicts to keep them manageable and moderately productive (or at least not destructive). Now we need to feed lots of methadone to the economy, to wit, house prices and the broke American Consumer.
It sucks being right when everyone wrong gets away with it, but that is modern life.
Posted by Noah
Mon Jan 28th, 2008 07:53 AM
Expat - its a common feeling the one you describe! Your not alone. Hard asset deflation amidst commodity inflation in an environment ripe with stimulus everywhere seems to be where we are right now.
If we dont get that stimulus and the govt/fed decides to let the free markets correct themselves, a financial meltdown is what you would get. It would be far more painful, but in the end, the private sector would step up and buy out the troubled institutions and commodity/pipeline inflation would not be as much a concern.
Obviously, it is not turning out this way. The more things get wrecked, the more the fed will ease and the more rumors of bailouts you will hear thus ruining any chance of private sector vulture moves.
Posted by Brenda
Mon Jan 28th, 2008 10:10 AM
Expat,
Very well put. I'm afraid, however, there's not nearly enough methadone to calm this beast, despite the Fed's and our fearless leaders' efforts to convince us otherwise.
Posted by Mike
Mon Jan 28th, 2008 11:05 AM
with LIBOR at 3.3% and 10 year treasuries at 3.60%, I don't think the resets are nearly the problem that people anticipated last April, when 10 year rates were at 5.25% and LIBOR spiked to almost 5.5%. Subprime teaser rates are one thing, but also a minority of the ARM loans outstanding. The (majority) prime ARMs will be resetting as well, and depending on when they were locked, they could very easily be resetting lower now that base rates are so low. Either way, the government bailouts coming will certainly include a waiver of prepayment penalties (at the expense of residential investors who will take further write-downs on bonds), that will allow most of these prime borrowers to refi into fixed rate loans at less than 6%.
I don't understand why people think we'll see a 50% correction. Especially in one year, that seems ridiculous. Also, remember that real estate is local, and in 1991, there was not a national reduction in prices, those price decreases were most significant in urban areas, while many suburban areas didn't feel a real impact. Considering the differing nature of urban quality of life (2008 vs 1991), the appeal of urban living to wealthier retirees (nearby doctors, lack of reliance on cars, delivery for everything, never being absolutely alone), and finally the shift in affordability (gas at $3 a gallon makes the appeal of spending $600 more per month - car payments/servicing + gas - on a city apartment is more appealing. The lack of crime in Manhattan, SF, and Seattle make them naturally appealling. 2008 is substantially different from 1991 in Manhattan collapse, and should help keep Manhattan from being hit as hard as the rest of the country, but that "insulated" hit could be -20%, it could be -10%, or it could be simply flat.
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