60 Minutes had a great piece on the mortgage mess this evening. It pretty much parallels what most of us here already know. This mess is far from over!
I have been hearing for months here and there about these Alt A & ARM loans coming to fold - seems though folks just haven't wanted to face that we aren't done with carnage...through all this - I don't know how people could have thought that these dumb a** loans would not come back to haunt them in a few years -
I wonder when an asset, such as vacant foreclosed house, crosses over the line and becomes a liability? Is there no person or computer who can gather together facts, such as these loan program failures and then take a look at the increasing supply of vacant homes, factor in real incomes, and then price homes to sell?
Is a home not worth more to the community, the bank, to all, when it is occupied and someone is paying a mortgage, taxes, utilities, and mowing the lawn? Better that than letting pegions roost in the attic and gangs throwing rocks thru the windows.
Some have suggested that the solution is to bulldoze the vacant homes, in an attempt to decrease supply and buoy prices. No, just price the darn things where people can afford to live in them, and that means all the factors: price, loan package, taxes, fees, all have to be affordable.
We are forgetting - some of the vast majority of these mortgages that are going bad had PMI. Believe me - some of these banks aren't hurting that bad because they received the PMI on a fair amount of these defaulted loans - if not - you would have had allot more banks going under than what did.
There is a fine line when reporting P&L because you are between liquid and paper. The banks totally see what is going to happen - but again - as I have said in this blog before - until the bank retains that house back - it does not have to be reported as a loss - thus - it buys time...but only on paper.
Won't the foreclosure problem be mitigated by this observation noted on the comments section of the 60 minutes website?:
"I think Scott Pelley and Whitney Tilson gave a very one-sided, half-truth commentary on last night''s 60 minutes. I have been in mortgage banking for 40 years and have written two books on the subject. I think I know something about it. What was not told is that Alt A loans are also categorized as sub-prime. They are no-doc and low-doc loans to borrowers with A credit but they still require little or no verification of assets or income. Their delinquency numbers are included in any statictics about defaulted sub-prime mortgages. Also, many of the pay option ARMs are already included in the default totals. In addition to that, many pay option ARMs have already successfully reset. There is this great fear that when ARMs come out of their teaser rates that the new rate will be higher than the initial rate and cause a great avalanche of defaults. The fact is that on most three, five and seven year arms that are now resetting, they are resetting to lower rates. A typical reset today is in the neighborhood of 4.25%. The initial interest rate on most of these loans is higher than the rest rate. The discussion of the condo market in Miami is unfortunately about right. There has been much overbuilding and the supply is insane. I am from South Florida and can attest that this is the softest condo market in recent memory and it will take years to correct. The single family market is stronger than the condo market but it too is weak compared to much of the rest of the country."
golfer x: Perhaps,but in the end - some big bank who bought out a little bank (including that banks bad mortgage deals) are going to make money.
Roger: While I agree with you that rates are adjusting to a lower % on these ARM's - allot of these folks have lost their jobs or have had to take pay cuts because of the falling economy. If you have no income to pay for that mortgage, it doesn't matter how low that rate is.
Lets talk California. There are 1.4 Million of those Option ARM loans, most of them in Ca. It also doesn't matter if the reset only goes to 4.5% on those option ARMs. If the borrower is required to pay the full payment (interest and principal) most will still default. They are currently defaulting at the minimum payments on the option-ARMs (payments which are less than just the interest on the loan). Once those go to full payments those people have no chance. Those reset charts are also based on the max time the loan allowed. But many of the borrowers are hitting the loan limits well before the reset dates. Nearly all of the people with those loans are making the minimum payments (That's less than just the interest, so the balance of the loan goes UP!).
"X" - you are correct - the statistics are showing that these borrows of ARM loans are only making the minimum payments....ESPECIALLY in California - you hit the nail on the head!! I mean, the big boom in the amount of homes sold and for a high price here in CA was unbelievable! These folks aren't mortgaging $200k or $300k - they are mortgaging (probably) a minimum of about $500k (for a 3bd 2bth fixer upper)You are looking at a mortgage around $3500 a month - Good Lord - not but 10 years ago that bought you in Coto.
Option ARMs were toxic because they allowed people to borrow and pay more than they should have for homes. They allowed lenders to qualify borrowers at interest only or teaser rates. This was in addition to not checking their income and assuming an unsustainable 50% of gross would be set aside for housing.
Roger is correct that their payment shock is currently a lot less than most people realize.
The driver of defaults on these loans is not rate resets, but rather having $600K mortgages on $300K homes. In the future, rate resets could be a problem because these are, ultimately, variable rate loans.
Oldtimer: I'm not an expert but it seems to me that at this point a majority of people who have homes now on which they are able to make payments are going to hold on to them. Even though prices may have fallen by 50% there shouldn't be much incentive to sell unless they lose their jobs. I'm thinking these are primarily older people who may be less likely to lose their jobs. Many may also be "buy and hold" types. My prediction is that prices in the IE at the end of 2009 will be higher than now.
I don't think your right there Roger. I don't know anyone that bought at the peak that plans to "stick it out". Every single person I know that is WAY upside down is trying desperately to get out. Whether they can afford it or not. They are short selling, trying to "Buy and Bail" or they are hoping for the mortgage write-down fairly to magically reduce there loan amounts.
People that are not upside down or just barely upside down will keep paying. The rest are looking for the exits, any exit.
I don't think you realize just how many people with Option ARMs in the IE that are making minimum payments. When those adjust to full payments, even at 5% interest they are looking at double or triple their current payments. There's no way they can swing that. One of my buddies has a Option ARM for his $650k house. He is paying $1800/mo. When it resets in April his loan amount will have risen to around $750k and his payments will jump (he thinks) to around $4300/mo. That's about 60% of his and his wifes take home.
There are a lot of those loans that are hitting the limits. Many of those people have been hoping for a market recovery or a government bailout. Neither of those look like they're happening. So, I doubt the foreclosures are going to slow anytime soon. My personal feeling is it will be 2015 (at least) before prices start to rise again.
Prices are not going up for a long, long time in the IE or O.C.(but the O.C. will be first that's for sure)
I heard on CNN that one of the only places where homes are actually increasing in value and have been consistently (5% each year which is right around where they realistically should) is the Carolina's.
I have a friend from N.C. - she said that the homes are priced to the median income - what a freakin' novel idea. We CA's - we love to keep up with the Kennedy's and we price our homes to 10x what the median income is - we loose our shirts and then BLAME it on the lenders - oh please!
There is indeed a new wave of foreclosures coming - mixed with the already populated foreclosures - it's a bad cocktail for most but for some of us holding out buying that home - cha-ching!
13 comments:
I have been hearing for months here and there about these Alt A & ARM loans coming to fold - seems though folks just haven't wanted to face that we aren't done with carnage...through all this - I don't know how people could have thought that these dumb a** loans would not come back to haunt them in a few years -
I guess it's time to start waking up the sheeple. Keep that powder dry, folks.
I wonder when an asset, such as vacant foreclosed house, crosses over the line and becomes a liability? Is there no person or computer who can gather together facts, such as these loan program failures and then take a look at the increasing supply of vacant homes, factor in real incomes, and then price homes to sell?
Is a home not worth more to the community, the bank, to all, when it is occupied and someone is paying a mortgage, taxes, utilities, and mowing the lawn? Better that than letting pegions roost in the attic and gangs throwing rocks thru the windows.
Some have suggested that the solution is to bulldoze the vacant homes, in an attempt to decrease supply and buoy prices. No, just price the darn things where people can afford to live in them, and that means all the factors: price, loan package, taxes, fees, all have to be affordable.
We are forgetting - some of the vast majority of these mortgages that are going bad had PMI. Believe me - some of these banks aren't hurting that bad because they received the PMI on a fair amount of these defaulted loans - if not - you would have had allot more banks going under than what did.
There is a fine line when reporting P&L because you are between liquid and paper. The banks totally see what is going to happen - but again - as I have said in this blog before - until the bank retains that house back - it does not have to be reported as a loss - thus - it buys time...but only on paper.
Won't the foreclosure problem be mitigated by this observation noted on the comments section of the 60 minutes website?:
"I think Scott Pelley and Whitney Tilson gave a very one-sided, half-truth commentary on last night''s 60 minutes. I have been in mortgage banking for 40 years and have written two books on the subject. I think I know something about it. What was not told is that Alt A loans are also categorized as sub-prime. They are no-doc and low-doc loans to borrowers with A credit but they still require little or no verification of assets or income. Their delinquency numbers are included in any statictics about defaulted sub-prime mortgages. Also, many of the pay option ARMs are already included in the default totals. In addition to that, many pay option ARMs have already successfully reset. There is this great fear that when ARMs come out of their teaser rates that the new rate will be higher than the initial rate and cause a great avalanche of defaults. The fact is that on most three, five and seven year arms that are now resetting, they are resetting to lower rates. A typical reset today is in the neighborhood of 4.25%. The initial interest rate on most of these loans is higher than the rest rate.
The discussion of the condo market in Miami is unfortunately about right. There has been much overbuilding and the supply is insane. I am from South Florida and can attest that this is the softest condo market in recent memory and it will take years to correct. The single family market is stronger than the condo market but it too is weak compared to much of the rest of the country."
You may be overestimating how many of those loans had PMI. Many of those people used 80/20 loans in order to avoid paying PMI.
golfer x: Perhaps,but in the end - some big bank who bought out a little bank (including that banks bad mortgage deals) are going to make money.
Roger: While I agree with you that rates are adjusting to a lower % on these ARM's - allot of these folks have lost their jobs or have had to take pay cuts because of the falling economy. If you have no income to pay for that mortgage, it doesn't matter how low that rate is.
Lets talk California. There are 1.4 Million of those Option ARM loans, most of them in Ca. It also doesn't matter if the reset only goes to 4.5% on those option ARMs. If the borrower is required to pay the full payment (interest and principal) most will still default. They are currently defaulting at the minimum payments on the option-ARMs (payments which are less than just the interest on the loan). Once those go to full payments those people have no chance. Those reset charts are also based on the max time the loan allowed. But many of the borrowers are hitting the loan limits well before the reset dates. Nearly all of the people with those loans are making the minimum payments (That's less than just the interest, so the balance of the loan goes UP!).
"X" - you are correct - the statistics are showing that these borrows of ARM loans are only making the minimum payments....ESPECIALLY in California - you hit the nail on the head!! I mean, the big boom in the amount of homes sold and for a high price here in CA was unbelievable! These folks aren't mortgaging $200k or $300k - they are mortgaging (probably) a minimum of about $500k (for a 3bd 2bth fixer upper)You are looking at a mortgage around $3500 a month - Good Lord - not but 10 years ago that bought you in Coto.
Option ARMs were toxic because they allowed people to borrow and pay more than they should have for homes. They allowed lenders to qualify borrowers at interest only or teaser rates. This was in addition to not checking their income and assuming an unsustainable 50% of gross would be set aside for housing.
Roger is correct that their payment shock is currently a lot less than most people realize.
The driver of defaults on these loans is not rate resets, but rather having $600K mortgages on $300K homes. In the future, rate resets could be a problem because these are, ultimately, variable rate loans.
Oldtimer: I'm not an expert but it seems to me that at this point a majority of people who have homes now on which they are able to make payments are going to hold on to them. Even though prices may have fallen by 50% there shouldn't be much incentive to sell unless they lose their jobs. I'm thinking these are primarily older people who may be less likely to lose their jobs. Many may also be "buy and hold" types. My prediction is that prices in the IE at the end of 2009 will be higher than now.
I don't think your right there Roger. I don't know anyone that bought at the peak that plans to "stick it out". Every single person I know that is WAY upside down is trying desperately to get out. Whether they can afford it or not. They are short selling, trying to "Buy and Bail" or they are hoping for the mortgage write-down fairly to magically reduce there loan amounts.
People that are not upside down or just barely upside down will keep paying. The rest are looking for the exits, any exit.
I don't think you realize just how many people with Option ARMs in the IE that are making minimum payments. When those adjust to full payments, even at 5% interest they are looking at double or triple their current payments. There's no way they can swing that. One of my buddies has a Option ARM for his $650k house. He is paying $1800/mo. When it resets in April his loan amount will have risen to around $750k and his payments will jump (he thinks) to around $4300/mo. That's about 60% of his and his wifes take home.
There are a lot of those loans that are hitting the limits. Many of those people have been hoping for a market recovery or a government bailout. Neither of those look like they're happening. So, I doubt the foreclosures are going to slow anytime soon. My personal feeling is it will be 2015 (at least) before prices start to rise again.
Sorry folks - I totally agree with "X".
Prices are not going up for a long, long time in the IE or O.C.(but the O.C. will be first that's for sure)
I heard on CNN that one of the only places where homes are actually increasing in value and have been consistently (5% each year which is right around where they realistically should) is the Carolina's.
I have a friend from N.C. - she said that the homes are priced to the median income - what a freakin' novel idea. We CA's - we love to keep up with the Kennedy's and we price our homes to 10x what the median income is - we loose our shirts and then BLAME it on the lenders - oh please!
There is indeed a new wave of foreclosures coming - mixed with the already populated foreclosures - it's a bad cocktail for most but for some of us holding out buying that home - cha-ching!
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