Next Wave of Mortgage Defaults

[FRED]

No news here for iTulipers, but we note that 1.5 years after our initial report the news on the next wave of mortgage defaults is going mainstream.

Can the U.S. economy digest the trillion dollar ARMs egg? March 2007
Fueling the FIRE Economy March 2007
Everything you ever wanted to know about how bad the mortgage mess is but forgot to ask July 2007

Hat tip to Mega for the video

[Mega]

Re: Next Wave of Mortgage Defaults

Yep, that's a BIG "Defo" Fred, i got this in 2007:-

[Mega]

Re: Next Wave of Mortgage Defaults

Even a Jerk like me was able to at once see the horror that was to unfold......."They" think that all they have to do is add liquadty....just like filling a hand basin.............trouble is its not a hand basin.....its Swimming pool!

"They" don't have the cash, simple!
Mike

[don]

Re: Next Wave of Mortgage Defaults

The timing on making these things "public" that we've known for years is 100% political.

[Guest]

Re: Next Wave of Mortgage Defaults

Are these rates tied to something else besides the treasury rates that are now being lowered to near 0%? (Libor?) If so, wouldn't that forestall another wave of defaults for a while?

I'd wonder if part of the government's attempt to keep rates low is to prevent this next wave of resets from happening.

[D-Mack]

Re: Next Wave of Mortgage Defaults

Are these rates tied to something else besides the treasury rates that are now being lowered to near 0%? (Libor?) If so, wouldn't that forestall another wave of defaults for a while?

I'd wonder if part of the government's attempt to keep rates low is to prevent this next wave of resets from happening.

The guy in the video mentioned people already defaulting on teaser rates.

I don't know to what they are tied, but will it mean that the reset will be higher than the teaser rate but not so high as with previous Fed rates?

Housing will continue its decline, probably for most if not all the year. Why? Well, for one thing there are a lot of adjustable rate mortgages (ARMs) resetting in 2009. Now you might think the low rates will allow them to reset lower, and in some instances that is likely correct, but the wonderful lenders came up with a nice product called an option ARM that lets the buyer chose among various payment options, which can include paying interest only or even less than that. Moreover, while rates are low now, ARMs almost always start with artifically low teaser rates well below where the reset will go, despite low rates today. Accordingly, there will be a host of new foreclosures adding pressure to prices, along with unemployment and other factors. Some markets are near a bottom already, like parts of California, but overall, I suspect housing will continue its decline throughout 2009.

http://seekingalpha.com/article/1129...are-dead-wrong

[Verrocchio]

Re: Next Wave of Mortgage Defaults

Even a Jerk like me was able to at once see the horror that was to unfold......."They" think that all they have to do is add liquadty....just like filling a hand basin.............trouble is its not a hand basin.....its Swimming pool!

"They" don't have the cash, simple!
Mike

More like filling a sand pit.

[don]

Re: Next Wave of Mortgage Defaults

That was the one piece of new information to me, the teaser foreclosures. That must be those "owners" who were absolutely dependent on equity draws to pay the teaser.

Has kind of a Three Penny Opera ring to it, doesn't it :p

Equity Draws,
To Pay the Teaser....

(in Cockney, Mega ?)

Where, oh where, is Brecht

[swgprop]

Re: Next Wave of Mortgage Defaults

The nightmare component of the pay option ARMS (POA) is the payment shock associated with the conversion from teaser payment to fully amortized payment. This may be softened somewhat based on a low index rate, but is still a considerable adjustment for the borrower. Mr. Mortgage lays it out pretty well here ..

Pay Option ARMs - The Implosion Is Still Coming Despite Low Rates

[Chomsky]

Re: Next Wave of Mortgage Defaults

The nightmare component of the pay option ARMS (POA) is the payment shock associated with the conversion from teaser payment to fully amortized payment. This may be softened somewhat based on a low index rate, but is still a considerable adjustment for the borrower. Mr. Mortgage lays it out pretty well here ..

Pay Option ARMs - The Implosion Is Still Coming Despite Low Rates

It's obvious this will still be a problem without even having to consider the effect of the new interest rates upon reset. There's a second crucial problem for option-ARM borrowers upon rate reset. When the rate reset comes, the only payment option left is the full amortization one, meaning a huge price shock no matter the interest rate adjustment. The fact is that over 50% of all option-ARM borrowers have chosen the neg-am option for many months consecutively, all while real estate prices have crashed and are still crashing. That is, millions of borrowers have seen their principals grow (due to neg-am payment) while the value of their homes has crumbled. There's very little incentive for anyone that far underwater to continue payment, hence there will be a wave of defaults from such borrowers.

[jayers4647]

Re: Next Wave of Mortgage Defaults

Are these rates tied to something else besides the treasury rates that are now being lowered to near 0%? (Libor?) If so, wouldn't that forestall another wave of defaults for a while?

I'd wonder if part of the government's attempt to keep rates low is to prevent this next wave of resets from happening.

6 month LIBOR is so low that when added to the margin, borrowers will have lower payments without a refinance.They will benefit on these resets, and if they checked their promissory note it may be substantial.
Hopefully for those, that will remain until the reflation or devaluation.

[metalman]

Re: Next Wave of Mortgage Defaults

6 month LIBOR is so low that when added to the margin, borrowers will have lower payments without a refinance.They will benefit on these resets, and if they checked their promissory note it may be substantial.
Hopefully for those, that will remain until the reflation or devaluation.

per this chart...



...the gov't needs a superlow lie-bor until 60 months after jan. 2007... that's 2.5 yrs from a year ago... mid 2010. consistent with...



just askin'

[santafe2]

Re: Next Wave of Mortgage Defaults

per this chart...



...the gov't needs a superlow lie-bor until 60 months after jan. 2007... that's 2.5 yrs from a year ago... mid 2010. consistent with...

Metal, others. Anyone have an update of the Credit Suisse or a similar chart? I've seen this one several times on iTulip but it's a 24 month old snapshot and it would be instructive to compare this Jan 07 chart with a Jan 09 chart. Here are a few things we might be interested in further calibrating:

• According to the chart the first half of 2009 will present a period low default availability. The percentage of defaults may be high but the actual count of defaults should fall considerably. Over the last 2 years this trough may have been filled considerably with new short term loans OR if not, it will present the MSM with an opportunity to spin this trough as a recovery instead of a brief respite before a new and possibly larger storm.
• The chart depicts a larger falloff in loans available for default in Jan 2012 but of course this area and areas farther out are filling with new loans of various types and it will be instructive to know how much has been lent so we can compare that with the default trend to better understand the net effect.

We should expect the government to stretch these mortgage default issues out as far in time as possible. While this still may be a problem that peaks in 2010-2011, it should be around for much longer than that as it continues to ripple out for the next decade.

[Chomsky]

Re: Next Wave of Mortgage Defaults

Metal, others. Anyone have an update of the Credit Suisse or a similar chart? I've seen this one several times on iTulip but it's a 24 month old snapshot and it would be instructive to compare this Jan 07 chart with a Jan 09 chart. Here are a few things we might be interested in further calibrating:

• According to the chart the first half of 2009 will present a period low default availability. The percentage of defaults may be high but the actual count of defaults should fall considerably. Over the last 2 years this trough may have been filled considerably with new short term loans OR if not, it will present the MSM with an opportunity to spin this trough as a recovery instead of a brief respite before a new and possibly larger storm.
• The chart depicts a larger falloff in loans available for default in Jan 2012 but of course this area and areas farther out are filling with new loans of various types and it will be instructive to know how much has been lent so we can compare that with the default trend to better understand the net effect.

We should expect the government to stretch these mortgage default issues out as far in time as possible. While this still may be a problem that peaks in 2010-2011, it should be around for much longer than that as it continues to ripple out for the next decade.

I don't have an updated chart that shows all ARM rate resets, but one posted this past June regarding option-ARMs shows their rate resets will be coming significantly earlier than first expected -- that's because most option-ARM borrowers are choosing the neg-am payment option every month:




Option-ARM resets occur if one of two things happens:

1. a certain amount of time elapses (industry norm is 3-5 years)
2. the principal increases via neg-am payments to a certain level (norm I believe is 10%)

So the shape of the bar chart from Credit Suisse will ease slightly to the left, as option-ARM borrowers face earlier repayment due to principal limits being hit. The option-ARM crisis, originally forecasted to begin manifesting itself in early 2009, is already with us and will rise to a crescendo around January 2010 and remain a persistent problem through at least 2012.

[swgprop]

Re: Next Wave of Mortgage Defaults

This was an update presented by Business Week in June 2008:



http://www.businessweek.com/lifestyl...ndex_lifestyle

Basically the premise is that the payment resets occur sooner because the borrowers opt to pay the minimum payment which results in negative amortization.

The pay option ARMS (POA) comprise a variety of terms, but typical of most have terms relative to two events:

• Event 1 >> If negative amortization reaches a specific point such as 115% of the original balance, the loan payment will reset to an amount equal to "interest only". In other words, no more negative amortization.
• Event 2 >> Once a specified period has passed, typically 5 or 7 years, the payment is recast to an amount sufficient to fully amortize the loan over the remaining term.

So the chart put forth by Business Week takes into account the reality of how these loans are performing - 70 - 80% of the population make the minimum payment. Therefore many mortgagors may be subject to two payment shocks - Event 1 from neg am and Event 2 based on stated time frame.

When the loans were underwritten (and I use the term loosely) the ability to repay only considered the initial minimum payment. Thus the majority of these mortgagors will not be in a position to handle either payment increase.