Graphix,

You need to do a post about this on the main blog. People need to understand the mechanics of a "timebomb loan." We talk about these loans exploding, but until you sit down and imagine yourself in the shoes of one of these borrowers, you don’t fully appreciate the problem.

BG,

Some of the lenders like Countryfried are sending out notices well in advance letting them know their balance and P&I are. But I doubt that many people pay attention or really understand this loan so the notice probably gets ignored. This is the ticking time bomb that everyone underestimates. All the charts that show the rate adjustments are optimistic because they factor in that the recast won’t happen for five years. As you can see it is happening a lot sooner than five years.

IR,

I have been thinking about doing a post on this for a while now. Now that I have the data in an image file I think I will throw a post together on it for this week. Like I said to BG this loan will recast before the five years and I think I will have to take a look at the 115% neg am version too.

Graph—
Thanks for the graph’s (pun intended).  You’ve just detailed what my daily job has become.  Someone posted earlier in the thread about the many others out there that have 30 year fixed loans.  Even if only 20% of the homedebtors in OC had option arms, this number is more than enough to cause serious destruction.
Also you were using the example of the graduated minimum payment which allows the minumum payment to increase by 7.5% a year.  There are also fixed minimum payments as well.  There are also FORTY year option arms out there too, because the 30 year pmt was too high.  As I said before, I have not seen a single Truth in lending disclosure that shows the minimum payment lasting for a full 5 years.  When the TIL is generated it assumes the same rate for the life of the loan, and that couldn’t be further from the truth.
As a matter of fact, I would say at least 70-75% of the TIL disclosures show a minimum payment lasting less than 36 months.  This means that either way the borrower is f*cked. They’ll have to refi and pay the ppp or absorb a higher monthly payment.
By the way I hope we all have been watching the asset-backed securities market.  If you haven’t seen the charts at calculated risk, please check them out.  Once you do I will ask you this….if the secondary market appettite for this type of security is still deteriorating, how are banks still originating loans, and how are rates improving??
Because banks are loading up on these loans and hoping to God that they’ll be able to sell them in the near future.  As a bank we don’t have a choice.  We can’t just stop doing loans altogether.  We simply cannot continue to operate at our current cost levels by only doing conforming loans.  Something has to give, and by give I mean collapse, hard.

"Even if only 20% of the homedebtors in OC had option arms, this number is more than enough to cause serious destruction."

This is an important point many people either don’t understand or chose to ignore: a small number of comps inflated the prices, and a small number of comps can destroy them.

Financing is everything. If people still had the ability to borrow $700,000, then a few REOs at $400,000 wouldn’t make any difference because people would quickly bid the prices back up to $700K. However, if the ability to finance is limited at $400K, then so will house prices.

LM, you say: "By the way I hope we all have been watching the asset-backed securities market".
Sorry for my ignorance but what market indicator (index or fund) are you referring to?

LM,

I will take a look at the 5 year fixed option ARM. I still have some old rate sheets that will have the margins. Do you remember when those came out? IIRC it was late 05 or early 06. I never sold that loan because I thought it was stupid. I did sell a few of the 1 month option arms but it was mostly to people who requested them. I always tried to explain very similar to what is above to them but real estate always goes up I was told. As for the 40 year I don’t think it will change things all that much because the margins were higher.

Roo,

LM is probably talking about Calculated Risk’s posts on the ABX indices. Other than that it is a secretive world as to what prices MBS securities are trading at if at all.

I believe Chevy Chase was the first to come out with this saturday night live loan.  For those who think the name is funny, Chevy Chase Bank is a large portfolio lender based in Maryland.  They were one of the very first to come out with a five year fixed pay program.  This was much easier for brokers to sell because they’d just tell the borrower it was a five year fixed @ 1.95%.  The borrower didn’t question this as much as a graduated payment program.
Chevy Chase’s Adjustable Rate Rider actually stated "your monthly payment of principal & interest was ........"  when in fact that was actually the minimum payment.  I believe that while extremely misleading it was within RESPA guidelines. This was the case with many wholesale banks.  Later in 2005 and early 2006 banks began to make the concept of negative amortization more transparent.  The documents even had a one page disclosure stating that you are signing up for a neg am loan.

I can’t remember where I first heard about this loan but I know that Bear Stearns was the buyer. Then they opened up their wholesale division and more lenders offered it. Paul Financial was one of them and I just looked at the rep with crossed eyes saying to her but it recasts in less than 5 years how can you say it is fixed for 5 years. Anyway I plugged in the numbers and at 110% it recasts in month 39 and at 115% it recasts in month 53.

Chevy Chase is also a very nice neighborhood in MD just north of DC. If I had to live in the DC area I would want to live in Chevy Chase.

It’s a good product for certain people. Lets say your in sales and you have a bad month you can at least make the min payment. If you are using it as a rental and have no renters for a month again cheap payment. If you use it correctly its great.  The problem is most who have it are not the right people!!! I think I used to sell  maybe one or two a year.They should have been making at least interest only. This way they would have not adjusted before the 5 year mark. If they can only afford the min they are crazy to have got this product.  Most people just were never told the positive and negative. I

I actually think I/O loans are great with the caveat that you are a financially responsible person.  I/O does not increase your principal and can be tied in with a 30 year fixed rate.  When we were seriously looking a couple of years ago, Quicken’s 10/30 loan looked really attractive.   The loan makes sense economically because one is making payments mostly on the interest for the first ten years of a 30 years loan anyways. 
My view is that why should I lock myself into giving the bank more money.  Since I am fiscally responsible, I will just make payments as if it was a 30-year fixed.  However, if some emergency comes up I have the flexibility to pay less.  It is all about financial responsibility.    Also, most people make will make more money in ten years so having a lower payment up front is beneficial. 
The dangerous part is that if you only make the payment for interest for 10 years, you end up with a 20 year fixed loan at the end.

From the investor side of this, interesting option ARM article on Calculated Risk today.  Bascially, all that unpaid interest is counted as profit in earnings statements.
http://calculatedrisk.blogspot.com/2007/10/accounting-for-negative-amortization.html

I thought I knew this stuff, but didn’t realize that they reset in less than 5 years because of the caps.  Also, my mtg broker buddies didn’t believe in these loans, so I never got referred any.
These loans are still being made so the banks can cover their nut?
Oh, my.
The hub and I would pay extra on our fixed rate loan, because I did know that it’s all interest for the first 10 years.  So our 25 year mtg will be completely paid off in a couple of months.  After just 10 years in the house.   We didn’t pay extra on a regular basis, just when some unexpected bonuses or windfall came in.
And 20 grand when we sold a little house which we rented to (sorry) pestiferous renters.
 

Liz,
   Yes, we renters are pesky….  I just prefer to pay a company to take care of the apts.  Its not exacly a cheap, but my cap rate is a meager 3.8%.  Next year it will go up to about 7%. 
As for these loans, I recognised them for what they were.  If you abused it in any bit you’d pay, and pay, and pay.  If you’d be able to afford the regular 30 year payment (at about 60-75% of what you can afford).  That way you have some room.  BUT when you are at maximum of what you can afford, its a reciepe for disaster.
Anyways good luck
-bix

The stretching yourself part is hard because I think most people do buy at their max.  When we were looking, we could get a 2-bd comfortable but would have to stretch for 3 bd.  I know that we would have got the  3 bd just for the future value. 

Re; Lawyerliz "These loans are still being made so the banks can cover their nut?"
You bet.  Here’s a recent story on it.
<a>http://www.latimes.com/business/la-fi-loanpitch29oct29,0,645070.story?page=1&coll=la-home-business</a>

On today’s IHB Post, there’s the monthly ARM reset bar chart from Credit Suisse, where we see most Option ARMS resetting in 2010-2011.  I don’t what percentage of Option ARMS are negative amortization, but a good number of those Neg Am loans would likely reset 2 years ahead of schedule on their 5 year plan.  That would move more resets into 2008-2009 than the chart would suggest, puttting even more pressure on the market in 2008.

Damn, this time next year is going to be ugly.

ALL option arms allow for negative amortization.

LM,

  Damn, I thought I read somewhere that 80+% of borrowers of option ARM mortgages only make the minimum payments. 

A blast from the past with a nice update chart from Dr. Housing Bubble. Option ARMs are the “O” with a default rate above 30% and rising.

Look at those default rates and losses. Yikes!

IrvineRenter - 28 April 2009 03:33 AM

A blast from the past with a nice update chart from Dr. Housing Bubble. Option ARMs are the “O” with a default rate above 30% and rising.

Look at those default rates and losses. Yikes!

To the moon baby!

Here is a little dose of medicine for all here getting a little antsy.
But many people feel that they were left out of the bubble mania and can’t wait to sit on the sidelines for a few more months or another year. What do I tell them? Go ahead and buy but get yourself prepared to flush that down payment down the toilet. If you think waiting 1 year isn’t worth $50,000, $75,000, or even $100,000 them by all means jump in. You are flying in the face of the macro trend and jumping again with the sheep getting ready for the second slaughter. From today’s post at Dr. Housing Bubble

Mcdonna1980 - 28 April 2009 04:01 AM

Here is a little dose of medicine for all here getting a little antsy.
But many people feel that they were left out of the bubble mania and can’t wait to sit on the sidelines for a few more months or another year. What do I tell them? Go ahead and buy but get yourself prepared to flush that down payment down the toilet. If you think waiting 1 year isn’t worth $50,000, $75,000, or even $100,000 them by all means jump in. You are flying in the face of the macro trend and jumping again with the sheep getting ready for the second slaughter. From today’s post at Dr. Housing Bubble

I really don’t get why so many people are so antsy, impatient, and/or nervous about buying now.  I mean, are they that scared that mortgage rates will go up and they won’t be able to affordable a home because they are marginal buyers in the first place?  I’ll be more than happy to pay a 10% rate if home prices drop 50-60% from today’s levels (I’ll have a lower LTV and lower property tax payment).  I want this second wave of foreclosures to teach those kool-aid drinking sellers and realtards a little lesson about humility because we all know there are still way too many of them out there.