The Next Wave of Foreclosures 50 comments
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By Dirk van Dijk
So you think we are out of the foreclosure woods? Don't bet on it. Take a look at the chart below, created by Credit Suisse (a larger version is available here). It shows the date of first reset or recast of various classes of adjustable-rate mortgages (ARMs). A reset refers to a change in the interest rate, a recast refers to a change in the payment.
For most "plain vanilla" ARMs they are the same thing, but for Option ARMs the payment can change without a change in the interest rate. Option ARMs (the yellow part of the bars) allow the borrower to pay less than the amount of interest on the loan early in the mortgage life, with the difference being added to the principal of the mortgage. Even in a flat housing price environment, this would cause the loan-to-value (LTV) ratio to rise over time. In a falling home price environment, with both the loan growing and the value falling, it happens much more quickly.
The vast majority of the homeowners with these "pick a payment" mortgages pay only the minimum payment. When it exceeds a set level, or at a set date in the future (whichever comes first), the mortgage holder has to start paying the fully amortizing payment of the now much larger mortgage. This can cause huge jumps in the monthly payment, with increases of over 50% not uncommon.
These are the ultimate in "exploding mortgages." The number of these recasts is relatively small right now -- at about $1 billion per month -- but that number is set to grow dramatically over the next few years, exceeding $8 billion per month in the fall of 2011. If the equity in your house is gone and your monthly mortgage payment suddenly jumps from $2000 per month to over $3000 per month, what do you think is going to happen? How about if one or both of the people in the household has been laid off?
This is going to be a huge problem, particularly for Wells Fargo (WFC). The biggest writer of these abominations of housing finance vehicles was Golden West, which was bought by Wachovia, which was then absorbed into WFC. Unlike sub-prime mortgages, these were for the most part targeted at more upscale homeowners. The next wave of foreclosures will be in gated communities, not on the "wrong side of the tracks."
The chart shows that the sub-prime problem is largely behind us (dark grey part of the bars), as most of those teaser rates have now expired. As long as people have some equity in their houses or are less than 5% underwater, it is possible for them to refinance their mortgages as long as rates stay low. The refi of up to 105% is part of the Obama housing relief plan. If people are further underwater than that they are out of luck (and increasingly out of a place to stay).
Refi's have helped many people and have cushioned the impact somewhat. However, their most significant effect has probably not been in preventing foreclosures, but in raising the disposable income of those who would have probably been able to stay in their homes in any case. This has worked like a tax cut and has helped to maintain consumer spending. But in any case, that pig has mostly worked its way through the python.
Instead, the Option ARMs and the Alt-A loans are going to be the big problem. Alt-A loans (green) were offered to people with good credit ratings, but were often jumbo loans, or were low-or-no-documentation loans (aka "liar loans").
The next wave of foreclosures is going to have much higher average loan balances, so each foreclosure is going to hurt the banks more. So far, more upscale communities have avoided the full impact of the housing crisis. Over the next year, they will be the central part of the story.
Foreclosures being dumped onto the market have caused the low end of the housing market to suffer much larger percentage declines in values than upscale areas have seen. Currently, there has also been much more activity in the existing home market at the low end of the market, with about half of all sales being "distressed sales" (either short sales or recent foreclosures).
The high end of the market still remains frozen, particularly for properties that need mortgages above the local conforming limits (max $730,000 nationwide, but varies by local area). This has caused the median transaction value to decline more sharply than if the relative activity between high end and low end homes had stayed constant. As foreclosures move more upscale, we may well see an increase in median existing home sale price. I'm sure this will be spun as good news of a housing bottom. Don't believe it -- it just means that the cancer is spreading.
This wave of foreclosures is over and above the current uptick that is happening due to the expiration of foreclosure moratoria at Fannie Mae (FNM) and Freddie Mac (FRE) and because mechanisms put in place by several states to slow down the foreclosure process have run their course. The vicious cycle continues -- lower home prices put more homeowners under water, which leads to more people walking away or being foreclosed on, which in turn further lowers home prices.
The reduction in wealth associated with this spiral causes people to need to save more, and reduces the amount they will spend. This leads to lower demand and higher unemployment. Higher unemployment then leads to more people being unable to afford their mortgages, leading to more foreclosures.
The housing crisis is not over, not by a long shot. Based on the recast and reset schedule shown below, it could last all the way until 2012.
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This article has 50 comments:
What do we do about it?
Though not a lot appears to have changed . . .
D_V,
What they are Trying to do is jawbone down the 10-year note, to lower the mortgage rates tiied to it, While passing legislation making it easier to re-write these loans.
Neither will work. The 10 year note - well, look at todays chart. Ugly, ugly. The fed is losing. And bills aimed at re-writing mortgage obligations will a) not address the high end failures outlined in this article, and b) add political risk to market risk, frightening off potential mortgage lenders in the future, raising rates further.
What we should do: back off, let the failures fail, let the bad lenders collect what litle they can, let prices deflate down toward a natural level.
But that doesn't buy votes, now, does it?
Remember that the largest option-ARM issuers were WAMU (now part of JPMorgan Chase) and Wells Fargo (which inherited the Golden West Financial portfolio via Wachovia).
One might inquire as to what value JPM and WFC are carrying those Option ARMs . . . there's no reason for them to expect them to recast at the anticipated rates, and given what we know about the difficulties in processing the existing foreclosure pipeline, no reason for them to want these to foreclose.
So I'd expect a deal 'tween Treasury and JPM and WFC to stave off these recasts. The more troublesome problem is the creation of a permanently underwater inventory-- homes with negative equity and low payments, which will sit idle until the next bout of inflation raises prices high enough to make a deal worthwhile.
Based on the FDIC's expansion plans BankUnited is a drop in the bucket. Shorting UYG (via LEAP puts) appears to be a good option. Maybe CNBC's bull market will start December 21, 2012. Those green shoots seem to be besieged by weeds.
They're fudging the numbers on valuations (again). I'm seeing people qualify for the MHA (or HAMP or HASP, or whatever the hell they're calling it at your respective lender) with 2007 loans who are certainly more than 5% underwater.
They're overestimating the values on the properties, so more people are qualifying. I'm sure there won't be any negative consequences to this "lite" version of appraisal fraud.
This is the mortgage industry's version of "It was a computer error!"
Putting aside moral judgments, what the U.S. government SHOULD have done as soon as the collapse started was to pay down ALL mortgages by about 20%.
This would have put a firm, REAL "bottom" in the housing market. More importantly, it would have bailed out the UNDERLYING assets on the bankster balance sheets - and saved the U.S. government TRILLIONS, rather than simply bailing out the 30:1 leveraged bets directly.
This would have (at least) cut in half the $12 TRILLION spent or pledged by the U.S. government. However, as I wrote in "The Bankers Manifesto..." (www.bullionbullscanada...), neither the bankers NOR the U.S. government want to help U.S. homeowners.
They WANT Americans to lose their homes so the banks can seize all that property.
On May 21 05:14 PM D_Virginia wrote:
> Variants of this chart and its associated analysis have been floating
> around for well over a year now...but the big question still remains:
>
>
> What do we do about it?
I think that chart over-estimates the recast problem because, as you say, the vast majority of option ARM borrowers only make the minimum payment. Those who only pay the minimum each month will trigger an early reset on the loan long before the scheduled reset. That would mean a certain percentage, perhaps large percentage, of those in yellow have already been foreclosed upon or are currently in the process of being foreclosed upon.
Reinflate that housing bubble, and do it now! A rising tide lifts all ships! Drown us in greenbacks, before we all go under! All we need is a 20% boost in home prices to rescue these folks!
We have two choices- pain now, or pain later. Americans used to suffer now, so our kids could have a better life. Now, we'd rather our kids suffer later so we can have a better life.
On May 21 05:14 PM D_Virginia wrote:
> Variants of this chart and its associated analysis have been floating
> around for well over a year now...but the big question still remains:
>
>
> What do we do about it?
Well, "we've" already done it. Monetary and fiscal policy since 9/08 has pointed to a policy that suggests "they" intend to inflate us out of the problem. It is risky business. Leave the peddle to the metal just a little too long and your have our next really ugly economic problem, hyperinflation.
Ironically, in spite of all the rhetoric of the the Obama admin of being the friend of the working man, inflation and hyperinflation are the worst form of "taxation" on the poor and middle class (perhaps with the exception of state lotteries, but at least that is discretionary). Those with assets and "in the know" (e.g. the wealthy) stand to profit from inflation. Unintended consequences?
Obama: "Under my plan, of a cap and trade system, electricity rates would necessarily skyrocket."
Plus, former GAO chief says taxes will double.
And the Dems 'cap and trade' is going to cost everyone more than the bank bailouts. Do you think they will have the funds for mortgage bailouts in the future?
The only hope I see is that the "Global Warming" myth is Obama's Achilles heel. You won't see it in the big news media, but over 30,000 American scientists have signed the Global Warming petition that states: "“There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate.”
“Moreover, there is substantial scientific evidence that increases in atmosphere carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the Earth.”
Now, what WE need, as one columnist put it: 'America needs all of its 330 million people to be skeptics. It needs them to shake off the lies about “global warming” and demand by calls, letters, faxes, and emails that Congress steps back from the entirety of this foul piece of legislation (cap and trade) and to vote against it.'
He is talking about you and me getting of our ass.
video.google.fr/videop...
people need to see this.
Excellent article.
Another situation that's at work with the Option-ARM is that virtually all loans have a cap on the maximum deferred principal (usually 110%-120% of the original loan balance). So if a borrower elects the minimum payment, the deferred interest is added to the loan balance, When the cap percentage is reached, the loan automatically resets to amortize at the original index plus a margin over the remaining loan term.
In my opinion, this phenomenon has begun to affect Option ARM loans written in the past 4 years. Those loans will begin to reset at much higher payments this year, adding even more stress to the industry, raising default rates, and prolonging the inventory overhang.
Here's an example:
A borrower gets a $300,000 30 year Option ARM with a 1% start rate, 110% cap, and a run rate based on the COFI + 3.45% (common terms in 2006). The initial payment is $964.92. The 'regular payment based on current rates is $1423.61. The deficiency of $458.69 is added to the loan balance each month. In the 65th month of this loan, the loan balance reaches $330,000 (the cap amount). It's then amortized over the remaining term. But that makes the payment over $1700/month, presuming rates remain low (this example assumes a 0.5% COFI).
I submit that most families don't have an additional $800/month in their budgets for higher mortgage payments.
On May 22 09:36 AM Jeff Nielson wrote:
> "What to do about this"?
>
> Putting aside moral judgments, what the U.S. government SHOULD have
> done as soon as the collapse started was to pay down ALL mortgages
> by about 20%.
>
> This would have put a firm, REAL "bottom" in the housing market.
> More importantly, it would have bailed out the UNDERLYING assets
> on the bankster balance sheets - and saved the U.S. government TRILLIONS,
> rather than simply bailing out the 30:1 leveraged bets directly.
>
>
> This would have (at least) cut in half the $12 TRILLION spent or
> pledged by the U.S. government. However, as I wrote in "The Bankers
> Manifesto..." (www.bullionbullscanada...;view=article&...
> neither the bankers NOR the U.S. government want to help U.S. homeowners.
>
>
> They WANT Americans to lose their homes so the banks can seize all
> that property.
On May 21 05:14 PM D_Virginia wrote:
> Variants of this chart and its associated analysis have been floating
> around for well over a year now...but the big question still remains:
>
>
> What do we do about it?
Voila !! No more foreclosures, bankruptcies or worrying about green shoots. Americans can get back to the mall (Where we belong), drive more expensive "green" cars, hire everybody in Mexico to work for them, travel, dine out and in general, stimulate the hell out of the economy. Stock market soars, all problems solved. Even room for an Obama tax hike, but so what-- we can afford it.
Why settle for some partial measure like a 20% payoff of all mortgages when you can do it right and fix everything ?
On May 22 09:36 AM Jeff Nielson wrote:
> "What to do about this"?
>
> Putting aside moral judgments, what the U.S. government SHOULD have
> done as soon as the collapse started was to pay down ALL mortgages
> by about 20%.
>
> This would have put a firm, REAL "bottom" in the housing market.
> More importantly, it would have bailed out the UNDERLYING assets
> on the bankster balance sheets - and saved the U.S. government TRILLIONS,
> rather than simply bailing out the 30:1 leveraged bets directly.
>
>
> This would have (at least) cut in half the $12 TRILLION spent or
> pledged by the U.S. government. However, as I wrote in "The Bankers
> Manifesto..." (www.bullionbullscanada...;view=article&...
> neither the bankers NOR the U.S. government want to help U.S. homeowners.
>
>
> They WANT Americans to lose their homes so the banks can seize all
> that property.
I quote from Walls Street Journal: "What helped Wells Fargo in the first quarter was a $37.2 billion fourth-quarter write-down on the most troubled part of Wachovia's loan book; the remaining portion is less risky and will offer up lower losses in the future, the bank said."
online.wsj.com/article...
On May 22 09:45 AM John Wake wrote:
> Dirk writes, "The vast majority of the homeowners with these 'pick
> a payment' mortgages pay only the minimum payment. When it exceeds
> a set level, or at a set date in the future (whichever comes first),
> the mortgage holder has to start paying the fully amortizing payment
> of the now much larger mortgage."
>
> I think that chart over-estimates the recast problem because, as
> you say, the vast majority of option ARM borrowers only make the
> minimum payment. Those who only pay the minimum each month will trigger
> an early reset on the loan long before the scheduled reset. That
> would mean a certain percentage, perhaps large percentage, of those
> in yellow have already been foreclosed upon or are currently in the
> process of being foreclosed upon.
A deluge of foreclosed properties is going to hit the market. As per estimates not only banks are way behind on foreclosure repossessions, they are actually behind also on listing the already repossessed properties. About 30% repossessed properties are yet to be listed by banks nationwide, amounting to about 80,000 in California itself. These properties will further pressure the market and push the securities and everything else down.
Government works never done. President Obama and his Administration inherited the worst crisis in modern U.S. history.
I was simply pointing out that IF the U.S. government is actually serious about stopping the housing crash (which it is NOT), that it would have saved TRILLIONS of dollars by paying-down mortgages versus its more than $10 TRILLION in hand-outs and pledges to the bankster crime syndicate.
MANY Americans seem MUCH more opposed to their NEIGHBOURS getting a hand-out than the bankster-criminals! LOL!!
On May 22 09:36 AM Jeff Nielson wrote:
> "What to do about this"?
>
> Putting aside moral judgments, what the U.S. government SHOULD have
> done as soon as the collapse started was to pay down ALL mortgages
> by about 20%.
>
> This would have put a firm, REAL "bottom" in the housing market.
> More importantly, it would have bailed out the UNDERLYING assets
> on the bankster balance sheets - and saved the U.S. government TRILLIONS,
> rather than simply bailing out the 30:1 leveraged bets directly.
>
>
> This would have (at least) cut in half the $12 TRILLION spent or
> pledged by the U.S. government. However, as I wrote in "The Bankers
> Manifesto..." (www.bullionbullscanada...;view=article&...
> neither the bankers NOR the U.S. government want to help U.S. homeowners.
>
>
> They WANT Americans to lose their homes so the banks can seize all
> that property.
Yes, indeed, some system of paying down the mortgages or even lowering monthly payments for five years of all the people in AZ, NV, CA, and Florida who are 50% and more underwater through no fault of their own might have ended this crisis better than giving hundreds of billions to Wall Street that we can't even trace anymore.
www.wealthalchemist.co.../
US dollars is extremely weak and will only go weaker, consumption power is very low.
> I agree with D_Virginia and Jasper, this is not new information.
> However, hardly anyone in the mainstream media (outside of a recent
> 60 minutes piece) is paying any attention to this. Yet I struggle
> to understand how this isn't a big deal.
Exactly.
The media would far rather focus on the waterboarding of a few dozen Islamist terror suspects than the foreclosure, impoverishment, and bankruptcy of a few million Americans.
You didn't mention that this "CRISIS" was planted
by Mr. Carter.
> Yes, indeed, some system of paying down the mortgages or even lowering
> monthly payments for five years of all the people in AZ, NV, CA,
> and Florida who are 50% and more underwater through no fault of their
> own might have ended this crisis better than giving hundreds of billions
> to Wall Street that we can't even trace anymore.
I don't disagree that shoveling money at the Wall Street-ers was wrong. How would bailing out underwater homeowners in AZ, NV, CA, and FL be any more "right," though? I disagree that these homeowners are underwater "through no fault of their own." A person with common sense does not see a huge run-up in prices and then rush out and buy. Moreover, they do not buy with huge leverage and maybe even with no money down. I may feel some compassion toward them because they may lose their home, but their problems are of their own making.
The only situation where I believe the government should act is in those cases where there was fraud: a mortgage broker tells a buyer that they're getting a fixed thirty-year loan and it turned out to be an ARM. Even then, I'd require that the homeowner cooperate with the prosecution of the broker before any relief was granted to him or her at taxpayer's expense.
Unfortunately with unemployment at almost 7 million, millions of more homes will be foreclosed upon.
The rules were to lax and people who could not afford homes were allowed to own them. The adjustable mortgages also allowed people who could buy or move up to buy more house than they could really afford.
Does anyone have a way out, PLEASE HELP!
On May 22 06:34 PM mlonz wrote:
> Hate to pile on another negative factor, but the last 2 REO deals
> I have been involved in, the CASH sales were canceled because the
> bank had filed its forclosure paperwork incorrectly and didn't legally
> own the home yet. Enter a 4 month delay with the property, previously
> agreed to be sold for cash, being re-listed. This is the result of
> lawmakers making the forclosure process more onerous on a state by
> state basis. This is going to prevent the inventory from clearing
> big time. I had turned very mildly optimistic seeing many REO's get
> scooped up for cash this spring. This is not a good sign. When these
> same 2 properties come back on the market, I wouldnt be surprised
> if 30 year mortgage rates were 250 basis points higher.
On May 24 08:27 AM marketman54 wrote:
> The government did have another option which would have reduced their
> cash infusion to the banks. They could have mandated that all mortgages
> be rolled back to 4% for 40 or 50 years. This would have allowed
> many to keep their homes and save taxpayers a trillion dollars.<br/>
>
> Unfortunately with unemployment at almost 7 million, millions of
> more homes will be foreclosed upon.
>
> The rules were to lax and people who could not afford homes were
> allowed to own them. The adjustable mortgages also allowed people
> who could buy or move up to buy more house than they could really
> afford.
>
> Does anyone have a way out, PLEASE HELP!
Part of the program was enacted, but thus far it's been executed so unevenly and slowly that it's had a fraction of the intended effect, and the foreclosure bloodbath and its attendant costs simply continue to spiral onward. richardroll.com/?p=128
Then, the banks can hold the homes they own instead of selling at a major discount while the Fed's moderately inflationary (no hyperinflation- unless you consider oil going to $120 hyperinflation) policy puts a floor underneath dollar-denominated assets, goods, and services.
I agree this will be a long and slow process, but I don't see housing values falling much further than where they are now given there is already an adequate supply of foreclosure homes today. However, our government must address entitlements to assure long term rates remain low.
Yes, you did qualify your suggestion with "putting aside moral judgements".
But your last statement "MANY Americans seem MUCH more opposed to their NEIGHBOURS getting a hand-out than the bankster-criminals! LOL!!" kind of gave you away.
You are mistaken. Americans are as opposed to bailing out their neighbours as the banksters-criminals.
Aren't we supposed to believe in fair play?
So if you give 20% to every mortgage owners, what are you going to give others? There are people who have been living within their means, don't own a house, and have been waiting for prices to drop so that they can buy one. And now you want the government to intervene to raise property prices? Where's the fair play?
On May 23 02:25 PM Jeff Nielson wrote:
> I'd like to remind everyone that when I suggested the U.S. government
> pay-down all mortgages, I specifically added "putting aside moral
> judgments".
>
> MANY Americans seem MUCH more opposed to their NEIGHBOURS getting
> a hand-out than the bankster-criminals! LOL!!
On May 23 08:10 AM Mpyre... wrote:
> read your Gibbon...the empire is rotting from within which is historical
> par...this administration is simply throwing accelerant on a fire
> that started around 1964 with the Vietnam fiasco and the so-called
> Great Society Programs...big government has always been the main
> problem, and remains so.
On May 22 04:46 AM g452ooo wrote:
> I am hoping that Obama does something foolish and meddlesome when
> these Option ARM recasts peak in 2011. So much to the chagrin and
> disgust of the greater portion of the electorate that it costs the
> man his 2nd term. We so desperately need to be rid of him ASAP.
theburningplatform.com...
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