joyofyoga

Homebuilders Near a Bottom: Five Stocks to Benefit

Hey Tom - Just read that link! AMAZING! This is a great synopsis:

Posted: Wed Mar 21, 2007 12:37 am Post subject: Neg AM Recasts vs. Subprime Adjustments
The problem with Neg Am resets from loans originated in 2005 is that payment adjustments after recast can make the payment triple whereas subprime adjustments are typically around 30-35%.

Lets take a standard $350,000 loan at 75% LTV and compare a subprime 2 or 3 year fixed (interest only for first 5 years) at 6.5% to an "A" paper, prime option ARM with a 1.10% start rate, 40 year term, 5 year payment plan, 110% max increase to the principal balance.

Subprime: 350,000 at 6.5% = $ 1895., 1st adjustment: 3% to 9.5%. New payment: $2770.83. 32% increase. Interest only, no increase to balance, but decrease to value.

A paper Option ARM: $350,000 at 1.10%, 40 year: $901.64. Depending on margin, balance increases to 110% between months 28-38 (not 5 years payment schedule that is reflected on Reg Z). New balance at 110% $385,000 recast for remaining loan term per terms of note (NOW FULLY AMORTIZING) at fully indexed rate: 8.0% is fair average: new payment: $2702.00. Loan balance has increased and values have decreased. Add a piggy back second or E-line, and well... you get the picture.

The 30 year A Paper Option ARM fares a bit better. The recast occurs around the 36th month, and the payment only increases about 64%.

So, which is really worse, a stated subprime with a 32% payment increase or a stated income A paper Option ARM with trippling payment?

The Neg AM A paper loans aren't even on the radar screen. I nearly choked when Leatherface said that only 7% of their loans were subprime- when they led the pack in Neg AM financing (only they went to 90% CLTV). The only saving grace for Countrywide is that they went to 115% before recast which buys them a little more time than Downey.

This whole bubble thing is just getting started in California. Since incomes aren't rising to meet prices, prices will have to drop to meet incomes. Any economist that doesn't consider area incomes in their predictions are simply not doing the math. In the end, math always wins.

There is quite a bit of opportunity in the market. Some loans can be fixed, others can't. Some people who can hold out long enough will likely receive loan modifications with affordable payments. Some won't be so lucky.

One thing is for certain, however, is that affordability is going to be restored, and in the end, that is good math for economy and the industry.

Of course, I am curious how much this will really cost the taxpayers....
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"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe." Albert Einstein