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Will 2011 be the year of the option ARM default crisis? Not likely, according to Calculated...

  • Saturday, January 1, 2011, 3:23 PM ET
    Will 2011 be the year of the option ARM default crisis? Not likely, according to Calculated Risk. He's more concerned with falling home prices and negative equity.
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This news story has 22 comments:

  •  
    Default crisis? What do you call 14trillion in federal debt when interest rates rise?
    1 Jan 2011, 03:28 PM Reply Like
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    www.dailymarkets.com/e.../
    1 Jan 2011, 04:32 PM Reply Like
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    You realize of course that the data series referenced in the article includes refinancing appraisals, whereas Case Shiller includes only purchase transactions. In addition, the HPI covers only conventional mortgage purchases, thereby ignoring cash purchases and jumbos, etc. Whereas Case Shiller captures all of these transactions. Hard to draw the conclusion the author makes that the differences are attributable only to different geographic coverage. Lots more going on here than just that.
    1 Jan 2011, 10:41 PM Reply Like
  •  
    You raise a very interesting point...The All Transaction index was
    a very lousy index to follow in 2007 and 2008 ( and for that matter
    much of 2009). This index was considered very accurate until the
    development of the private label non agency mortgage market and
    missed a lot of transactions but this market doesn't carry the weight it
    once had( this market was 21% in 2006 and now the size is 12%) and ( I believe) the All transactions indexhas reemerged as
    a good index to follow. The Case Shiller Index particularly the 20 are heavily weighted in negative equity markets as well the Radar Logic 25. My opinion is we stay relatively flat for 2 years and begin
    a climb that will take is back to All Transaction Index High of the 1q 2007 by 2017 or 2018.
    2 Jan 2011, 04:25 AM Reply Like
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    As long as mortgage rates remain low the Option Arm crisis will not materialize. In the mean time the falling home values make the potential for a new massive mortgage default crisis IF/WHEN rates rise quickly. The deeply underwater homeowners will have no incentive to accept the new higher rates and will likely simply default and move on.
    1 Jan 2011, 05:30 PM Reply Like
  •  
    I agree; additionally, in CRE banks are pushing hard to clean up problem loans (the formerly hugely popular interest only bridge loans) doing workouts to get defaulted loans performing again O(easier in CRE since there is a revenue stream).

    The unfounded fears with regards to CRE were precisely these bridge loans which are now being worked out, and CRE's revenue streams allowed them to keep it together long enough to get them done.

    So, even though rates may go up, CRE will likely be mostly unaffected, and the bridge/ARMs etc on those properties won't create problems.

    If rates drive up dramatically, the workouts will encounter hiccups, and the folks getting extensions to their bridges ELOCs and ARMs will be in a pickle, along with the banks...
    2 Jan 2011, 08:19 AM Reply Like
  •  
    I am not as optimistic as you re: CRE. I think that the banks have a whole lot of trash in their CRE portfolios which is teetering on collapse. A quick and very positive turnaround in the economy will help but a slow but positive recovery scenario as we seem to be in will bleed a lot of the marginal projects to death. I also believe that in many markets there is simply too much product for both the present needs and for the near term future needs of those communities. Only time will tell.
    2 Jan 2011, 08:39 AM Reply Like
  •  
    the residential housing market is old news, the double dip housing recession is upon us and it is likely to be with us for another 12-18 months. what should be more of a concern is the effect the commercial realestate market collapse will have on a already struggling economy. the number of tenants that will exit high end lease locations either because of expiring leases or just walking away will send shock waves thru realestate REITs and commercial loan institutions.
    1 Jan 2011, 06:07 PM Reply Like
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    Mikey- on the contrary residential housing market is the big news not the commercial real estate market. The main reason is because while one (housing) did collapse the other CRE did not. The funny thing is the experts predicted the exact opposite to happen, so much for their prognostications. Those who invested in commercial REITs did quite well in 2010
    1 Jan 2011, 08:11 PM Reply Like
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    yes 2010 was a very good year enigmaman, but 2011 is very likely to include the distressed commercial properties that are part of the REITs portfolio. i would say, take your profits and be thankful. wait and see, if the commercial sector doesn't fall flat, then re-enter. when commercial realestate goes from $150 to $65-$85 a square foot then you have to understand that empty locations are in abundance. thats the tell tale of the business. i am only offering an insight, and forget the experts, i rather listen to each other anytime.
    1 Jan 2011, 08:22 PM Reply Like
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    mikey- CRE lenders have and will continue to accept current payment in lieu of refinancing their CRE, so foreclosure need never happen in this event. Bigger players have and will continue to pick up distressed commercial properties from owners and or lenders without much resistance, the empty stores you speak of will be absorbed into the market as they have always been by buyers here and abroad, what was once a big closed mall may become an open strip market, a ball field, a manufacturing plant or green space, in either case it will be used for something because land is finite in our ever shrinking world and therefore will always grow in value over time
    2 Jan 2011, 08:35 AM Reply Like
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    Who cares? We're going to have several crises all come to a head in 2011. Who cares which one we will have when the FED is debasing the currency, we're all already totally screwed. If you havent been byuing food and precious metals, its too late.
    1 Jan 2011, 11:34 PM Reply Like
  •  
    Children, children, don't fight – there'll be plenty of clusterf*ck to go around this year.
    Though I suspect it will Not feature the threats that are the most widely suspected to be the most likely.
    1 Jan 2011, 11:39 PM Reply Like
  •  
    I honestly don't see the problem here. Profit from this "collapse". VXX. Make money either direction with todays securities.
    2 Jan 2011, 12:26 AM Reply Like
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    i am forever open to new investment vehicles, but upon review of VXX it seems to have free fallen from 69 (sept. 30 2010) to
    37 (dec. 31, 2010). is this the collapse you refer to?
    2 Jan 2011, 11:12 AM Reply Like
  •  
    Well it's a inverse relationship. I'm not talking buying it now. But keep your eye on it to make easy profits and protect your gains. Instead of worrying about a second collapse, profit. All I'm saying. A trade not an investment.
    3 Jan 2011, 06:14 AM Reply Like
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    I am a lawyer and economist specialized in resolving technical disputes brought mainly to ICC Arbitration emanating during the course of the performance of International construction Contracts.. I do sincerelly believe tha pessimism does not improve the economy. Americans must fight hard to get out from the present predicament considerering that they have the guts the resourse and the leadership to do it as always successfully did in the past under comperativelly worse conditions .
    2 Jan 2011, 04:08 AM Reply Like
  •  
    Bravo! I commend your belief in optimism, and do agree that we need to fight hard to get out of the present predicament. However, in order to do that, we need jobs and cash in our pockets first.
    2 Jan 2011, 05:06 AM Reply Like
  •  
    the biggest threat to the housing recovery is not falling home prices or negative equity, its perception, by most accounts we are at or near the bottom of home prices and with our economy improving these can only help cause home prices to stabilize and slowly rise, negative equity is not a surprise its a known factor, and can be quantified. Even rising mortgage rates can be viewed as a positive because it will light a fire under buyers for fear of losing out on a great opportunity to buy homes at current price levels. If this is the perception it will all feed on itself and help reverse the down trend in housing, all the Admin has to do going forward is let the markets work it out and as for the Fed Reserve they just need to make sure their policies dont cause rates to rise to quickly squelching demand
    2 Jan 2011, 08:11 AM Reply Like
  •  
    i realize all the realestate views have very valid foundations but with the building permit filing at an all time low and the existing construction projects half complete the new home sales are suffering and will continue. As if houing hasn't suffered enough with the eventual second "dumping" of foreclosures soon to follow it can only depreciate housing further. i really can't see the recovery happening anytime in the near short term. now all these views are from individuals who are not living the downturn to the extent that it affects or impacts their daily lives. job growth will be at much lower paying positions with less disposable income available. sadly there are 100's of thousands of home owners who are being held hostage by their mortgages and they don't figure into the depressed market equation.
    The last estimated numbers on total realestate occupancy in the United States has shown over 19 million vacant properties. what will occur when more foreclosures are made known? people will buy no doubt, but once that trickling wave is over it will be low tide for a while.
    2 Jan 2011, 11:36 AM Reply Like
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    The double whammy from a potential second "dump" may also be that a lot of REOs have been purchased by speculators/investors, and if a lot of product hits the market fast, there is likely not to be much absorption from that segment, and that may cause a super spike downwards, especially if it gets assisted by rising interest rates...

    Scary endgame scenarios!
    2 Jan 2011, 07:10 PM Reply Like
  •  
    i am not sure if people are aware of how many projects limp into pre-construction phases. with like 20% of the needed capital on hand and lies thru the teeth to secure investors. even the most savy portfolio managers can't resist a good sales pitch, which is why so many professional portfolios are tainted.
    2 Jan 2011, 07:22 PM Reply Like
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