"Pick-a-Pay" Defaults Deepen - Housing Tracker

Quote of the Day

It’s like “coming up with a vaccine to a terrible disease, and then not giving it to people, or making it too expensive.” - Daniel M. Shlufman, president of the FCMC Mortgage Corporation in Clifton, N.J. Mr. Shlufman on the failure of Congress’s effort to make jumbo loans more affordable and accessible. (NY Times, Apr. 30th)

Subprime Fallout

Hopes for Bank Profit Upturn Sour on More Pleas for Capital. “The recent raft of capital raisings by large banks, including Wednesday's $4.5 billion stock sale by Citigroup (C), signals that the credit crunch has further to run... That doesn't bode well for banks' 2009 outlooks and may prove the recent run-up in financial stocks to be just another head-fake... This rally ignores what are likely to be mounting credit losses for both consumer and commercial loans because of the weakening economy and the continuing housing crisis. Morgan Stanley analyst Betsy Graseck: Any assumption of a return to normal profit levels is about three years too early.” (Wall St. Journal, May 1st)

U.S. Subprime Borrowers Need More Federal Aid, FDIC Chief Says. “Sheila Bair, the chairman of the U.S. Federal Deposit Insurance Corp.: The housing market can be stabilized only by programs aimed at turning unaffordable mortgages into affordable ones on a large scale… Congress should initiate a publicly funded loan program under which the Treasury Department would make loans to borrowers with unaffordable mortgages to pay down as much as 20% of their principal. Participating lenders would be required to arrange mortgages so as to ensure affordable long-term payments and to subordinate their repossession rights to the government's claims; Treasury loans would be delayed for five years and then amortized over the remaining mortgage periods.” (Bloomberg, Apr. 30th)

The Road to a Jumbo Mortgage Was Supposed to Get Easier. “The effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment. Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected… This month, government-sponsored… Freddie Mac (FRE) [and] Fannie Mae (FNM)) [which] help the housing market by purchasing loans in bulk from lenders, said that over the next year, it would buy up to $15 billion of the jumbo loans. That change… could lead to more loans and bring down interest rates.” (NY Times, Apr. 30th)

FTC Investigating Dozens of Mortgage Companies. “Lydia Parnes, Director of the Bureau of Consumer Protection for the Federal Trade Commission told a U.S. Senate Committee this week that the FTC is currently investigating the advertising practices of dozens of mortgage companies: “In the past decade, the FTC has brought 22 actions focused on the mortgage lending industry, with particular attention to entities in the subprime market, alleging that mortgage lenders and servicers engaged in unfair or deceptive acts and practices,” Parnes added. “Through these cases, the FTC has returned more than $320 million to consumers. Many of these cases have challenged deceptive advertising and marketing practices.” (DS News, Apr. 30th)

Defaults Rising Rapidly For 'Pick-a-Pay' Option Mortgages. “As the growth in subprime mortgage delinquencies appears to be slowing, lenders are seeing a rapid rise in defaults on a type of mortgage that gives consumers with good credit several different monthly-payment options. These mortgages, which are sometimes known as "pick-a-pay" or payment-option mortgages but are generically called option adjustable-rate mortgages, are turning out, in some cases, to be even more caustic than subprime loans, in part because the loan balance and the monthly payments on some loans is growing even as home prices are falling… Citigroup: Losses on option ARMs could be "in some cases close to subprime" mortgage levels.” (Wall St. Journal, Apr. 30th)

PFF To Report 4Q Loss Of $159 Million, Cites Real Estate Struggles. “PFF Bancorp - the holding company for Pomona First Federal Bank & Trust - announced Wednesday… that it expects to report one of its largest ever quarterly losses, totaling $159 million for its Q4 ended March 31… PFF also disclosed plans to restructure a $44M loan with an unidentified commercial bank that it couldn't repay by an April 30 deadline - an event that could have led to a default… PFF [also] announced loan and lease losses greater than expected in the quarter [$196M], a sign of the deepening real estate quagmire gripping the… greater Inland Empire region.” (Inland Valley Daily Bulletin, Apr. 30th)

Delinquent Mortgages Up 34% In Florida. “Credit and information management company TransUnion: Florida saw the greatest growth in delinquent mortgages in Q4’07 -- up 34% from Q3’07. California was up 33%, followed by Arizona, up 32%... Keith Carson, senior consultant in TransUnion: "Mortgage debt… is experiencing a downward slide not seen since 2005…. Mortgage loan delinquency, or the percentage of borrowers 60 or more days past due, was highest in Nevada at 4.68%, followed closely by Florida at 4.49%. Nationally, mortgage loan delinquency hit 2.99%, up nearly 17% over Q3’07. Florida ranked 14th in the country for average debt per mortgage borrower at $238,230.61. The national average is $191,370.” (Tampa Bay Business Journal, Apr. 30th)

First Horizon To Sell $600 Million In Stock, Change Dividend. “Tennessee bank First Horizon National Corp. (FHN) announced plans to sell up to $600 million in common stock and change its dividend payments to stock, showing even smaller financial firms are going to the capital-raising well and taking other moves to preserve capital.” (MarketWatch, Apr. 28th)

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Comments

[ArnoldCountry]

Pick a payment loans will most likely be worse. I have seen persons have a 460k loan with payments going along for 2 years at 1800.00/month all of sudden hit the 115% cap, recast and the new amortized payment jumps to 3600.00/month. Net income for the family is 4600.00/month. That leaves them $1,000.00 per month to pay utilities, cars, gas, food, etc. Cannot be done. Many families with these loans go one day from comfortably living in their homes to instant bankruptcy and having to make real choices about living. The lenders merely send them a notice saying here is your new payment next month. Its shameful that lenders expect that consumers can afford that type of payment shock. As these hit, given many of those some homeowners are under water on their values in the home already, the only decision will be to walk. Especially since there are plenty of rentals available in most markets for half their payment. Some lenders are being "generous" and lowering their rates by 2% for a couple of years but the payment still recasts and that savings is only a couple hundred per month at best. This type of shock is well beyond the shock experienced by many sub-prime borrowers.

[Chief DebtOfficer]

Jose Canseco walked away from his million house.

I think this news is telling something.

He walked away because he didn't want to pay. I'm sure any kind of bailout plan won't work for those kind of people.

[Pent updemand]

I agree with you ArnoldCountry that the lenders were crazy to offer those types of mortgages to "normal" buyers. Those mortgages were designed for people with uneven monthly cashflow; people who get paid primarily in large bonuses a few times a year.

But this is what you get when the originator doesn't have to hold the paper. He can tell himself that the customer will refinance in a couple years or sell the place for a profit so that he can sleep at night. Then he pockets his origination fee and moves on to the next guy.

[peoplsoft]

Everyone's comments are good.

Having lived in California for 18 years until 2005, one became firm in one's belief that prices only went up. They went up so fast that you didn't worry about a 2 year loan...you couldn't see that far ahead. many people jumped from home to home, move up to move up, neighborhood to better neighborhood. it was a musical chairs where there seemed to be enough chairs and people. now suddenly all the people putting the chairs there are gone.

all these loans were leant out because there were NO losers: homeowner got the loan and said "i'm going to make out by putting 0% down and making 20% on the house, that's infinite profit margin"; the mortgage broker got their fee (and their exotic cars believe me); the bankers got profits now with high points (did we forget about this? bankers thought there was no risk because they collected points up front. the loan officers then got bonuses from those points); the CDO and MBSecurities products got their fees, the ultimate bond holder received higher interest and believed they could get out of their bond fund when they wanted. The real loser who didn't see it was our Dollar and the taxpayers who would have to bear the cost from a lower Dollar and treasury debt payments into the future on top of a war.

[Tom Lindmark]

Pick-A-Pay mortgages or Option ARMs are without a doubt the next shock for the system. In my opinion, we are probably over the hump with regard to subprime loans but are just at the starting gate for Option ARMs. If you have time visit this link- blog.metro-real-estate... an article on them as well as a couple of interesting graphs which show the timetable for Option ARMs to begin adjusting and the concentration of this product by state. You can also go to my blog which is listed above and just type in Option ARM in the search box.

[gordon]

I read Canseco's story, he said even though he paid 41% in income taxes on his contract, he still made about $7-8 mil/yr. He lost a bunch but is underwater on his Encino house because he overpaid, but feels sorry for Americans who don't have a place to move. He said he has 2 books generating revenue, and can move somewhere cheaper rather than try and ever break even on that house.

One of our largest local homebuilders, Barratt, hasn't been paying their subcontractors for some time> tinyurl.com/6ch2et