SharonW

Another Big Bank Failure: More Likely Than Not to Occur

Reggie,

I was glad to see your endorsement of Mr. Mortgage. I also had a chance to peruse your website. Needless to say, I chuckled over your follow-up to this article/post today. It was a pleasure to view some more of the details and as I found the Fitch report on the web via your mention of it.

Later in the day I had gone back to read Mr. Mortgage when I then noticed that aside from Herb Greenberg being on his Blogroll, he also has you listed. Additionally, he also has Bill Fleckenstein, another I've been following listed. Suddenly, I realized that for the last two or so years I have been traveling within the same circle, but just finding new people all on the same route in different areas of the tubez. LOL

Shorter though perhaps egotistical-sounding version may be...great minds think alike. Or more humbly, a good mind knows enough to find and understand the great ones. :)

Another Big Bank Failure: More Likely Than Not to Occur

John Lounsbury,

I really should qualify my statements upon rereading. I know what I meant, but it wasn't clear. So let me clarify. Regarding the pay-option mortgages, I miswrote. The majority (80%) pay the minimum monthly payment which is even worse than the interest only payment. It is that fact that will put them into the 110-115% negative amortization zone sooner than their 5 year hard recasts. The rapid decline in home prices puts then further underwater than that, thus putting the owners in the position of not being able to refinance no matter what or to face double payments NOW, not five years from now. Those are going to be automatic defaults for the most part across the board.

Since you are gathering information for an article, and lord knows I'd love to see one that actually covered all that the media doesn't (I swear they've abandoned indepth research), let me refer you to a fantastic, albeit scary chart from the IMF 2007 Global Financial Stability Report. Go to pdf page 8 or report page 23 and have a look at Figure 1.7 Monthly Mortgage Rate Resets. There you will see the volume of option payment ARMS's based on the years they are expected to hard recast. This is the schedule that has now been moved up. It's not pretty.

www.imf.org/External/P...

Further, let me refer you to someone who is incredibly knowledgable on the intricacies of the mortgage situation and an early caller of the devastation we are now bearing witness to. I found him via Herb Greenberg, an analyst for whom I have much respect and who used to have a position on Marketwatch but left last year for reasons I do not know. Herb speaks for and cites this gentlemen for his credentials and incredible research.

Now the reason I give you such an indepth preface is that the gentleman's site looks...well...amateur... alarmist, and a bit silly. However, I can assure you that this is the person with which you'd like to familiarize yourself with and read what he's got to say. He covers the pay option ARMS in depth showing what happens to payments etc.

The site is (sigh) :
mrmortgage.ml-implode..../

Good luck!

On Dec 31 02:57 PM John Lounsbury wrote:

> Sharon W - - -
>
> You said "Regardless, so many have come to the conclusion that the
> worse in the housing market has been priced in and it will all come
> to a bottom in six months. Ha! A whole new world of pain awaits with
> the pay-option ARM mortgages getting prematurely pushed to early
> hard recasting due to the preciptious drop in housing values. <br/>
>
> Due to their five-year hard recast nature, most weren't expected
> to hit the banks in earnest until 2010. However, they have this nugget
> buried in their pits...a maximum 110% or 115% negative amortization
> trigger. Since approximately 80% of these mortgages have utlitized
> the interest only payment minimum, nothing has been paid into principal.
> Add to that the 20% or so decline in house values and these loans
> are coming to that trigger point years early. These will be instant
> defaults. INSTANT, as payments will virtually double for a house
> that people will now be overhwhelming underwater in.
>
> These loans could make subprime look like a stroll in the park."
>
>
> I have been doing research for an article on housing for the past
> several weeks. Your comment shows a knowledge of the nature of the
> still unresolved housing problems that most do not recognize. I am
> trying to define mitigating events that could unfold, but they are
> hard to find.
>
> Thanks for a great comment.

Another Big Bank Failure: More Likely Than Not to Occur

Reggie, this is the first time I've read one of your posts and, frankly, I found it to be spot on. When naysayers have nothing but bile for the message they will, of course, mock the messenger. And poorly, I might add.

I recently responded to another post in this site regarding REITS, if one recalls Goldman's last conference call just about two weeks ago, they had absolutely dismal things to say about commercial real estate loans. Horrifying, in fact. We've certainly become aware of credit card debt, car loan debt, student debt, etc. However, those may pale in comparison to corporate debt.

Regardless, so many have come to the conclusion that the worse in the housing market has been priced in and it will all come to a bottom in six months. Ha! A whole new world of pain awaits with the pay-option ARM mortgages getting prematurely pushed to early hard recasting due to the preciptious drop in housing values.

Due to their five-year hard recast nature, most weren't expected to hit the banks in earnest until 2010. However, they have this nugget buried in their pits...a maximum 110% or 115% negative amortization trigger. Since approximately 80% of these mortgages have utlitized the interest only payment minimum, nothing has been paid into principal. Add to that the 20% or so decline in house values and these loans are coming to that trigger point years early. These will be instant defaults. INSTANT, as payments will virtually double for a house that people will now be overhwhelming underwater in.

These loans could make subprime look like a stroll in the park.