WOT 4-12-2008

Just in case any of you forgot, about 1/3 of all loans originated in 2005 and 2006 in California were Option ARMS. Very few if any of the people with those loans will be able to refinance.

31 thoughts on “WOT 4-12-2008

  1. ice weasel

    Is something wrong with that map? Florida seems to be quite pale and Tampa isn’t even listed.

    It just seems odd. I would have expected Florida to be a bit darker.

  2. lawyerliz

    Nope. We did lots of stupid things, including fog-a-mirror and neg am loans, but not that. I never closed a single one of those, but a did close a refi that got the lady out of that bad loan within a couple of months of taking it out.

    She’s not stupid, but didn’t realize what she was signing until she looked at her payments and saw the balance going up. Then she hired me. She paid a whole lot of fees–again–and a huge prepayment penalty, but it was worth it, seeing she couldn’t refi now. Not that she isn’t credit worthy, just that banks are basically not
    loaning money.

    As shown by the percentages, some were done,but Fla did avoid that kind of stupidity.

  3. SacBoomer

    Things I learned at IHB:

    It’s OK to distrust Realtors (I always did, I just didn’t know why.

    It’s all about the resets.

    No bottom, not any time soon, not even in this decade.

    15 year fixed rate is sexy.

    No bailout, no way, no how!

  4. IrvineRenter

    [url=http://articles.moneycentral.msn.com/Banking/HomeFinancing/HomeownersWhoJustWalkAway.aspx?GT1=33010]Homeowners who just walk away[/url]

  5. madhaus

    Ya know, I’m stunned to see San Jose with a higher rate of option ARMs than Orange County. We are seeing price declines of up to 40% in the crap zip codes (East San Jose, for example, East Palo Alto, and similar parts of Redwood CIty) but it hasn’t happened in the “good” areas yet. Oh yes, there are slight declines, but no collapses. Yet.

    But with a rate of 35.2% option ARMs in ’05 and ’06, the foreclosure rate will go up, leading to all kinds of other problems.

    Why wasn’t San Francisco put on that map? Their prices are as high as ours and the median income is lower, so their unaffordability index is worse than ours!

    madhaus of Silicon Valley

    PS – I find the words hard to read in some cases. They could have easily said “maimer” or “manner.”

  6. shark

    I don’t know what your data source is on this post, but I cover Reno. The Option-ARMs perctages are hugely overstated, at least here. Closer to 5%, not the 20% on the death map.

    I’m as death and destruction on your market as most of you here, but give me a break, all you reset doom folks take a look at the current LIBOR – tons of loans are resetting BELOW their initial rates. Even some of the subprime stuff.

    And as long as I’m posting, ignore the last sales number on REO’s. Many of the banks are buying back their loans at a 25%+ discount right now. Saves on transfer taxes. Do your research, IR most certainly included.

    1. eric_u

      If the banks are buying back houses at a 25% discount to the loan balance, doesn’t that just mean that is the minimum bid on the property, and there is no competition? My understanding is that the sheriff will sell the property to anyone at that price, not just the bank.

      Seems to me that resets aren’t a big deal yet, and that the pain we’re seeing here is simply because normal people can’t really afford a half million dollar house without seriously funny financing.

      From what we’ve seen on this blog, people were apparently getting HELOCs to pay the mortgage and the HELOC payment, and buy stuff. That only works for a while.

  7. dilbert dogbert

    Things are strange in Silicon Valley. We just noted two home sales here in Palo Alto. One went for $1400 per sq ft and the other went for $1500. Both houses were small and on small lots. Both were on the market for about 2 weeks. I rented my place in San Jose after two days on the market with 5 offers.
    I have no idea why this is happening, esp, after reading IrvineRenter. I have no idea when the music will stop.

  8. Soapboxpolitico

    These resets are the nuclear time bomb ticking in the background of our wheezing economy. ESPECIALLY here in California! Man our dear state is in for some serious budget problems and the blood letting in real estate will surely be the shoe dropping. (Sorry about all the mixed metaphors!) 🙂

    I’m in sales for a very large telecom and my client base is a handful of the largest companies doing business here in So.Cal. My numbers are WAY off last year’s and many of my pending deals are stalled or simply not getting funded. It seems the CFO’s and CIO’s I regularly meet with have known the economy was slipping into recession long before The Decider and Big Ben suspected. In nearly every case, the number one or number two key initiative for my clients’ this year is cost reduction/cutting.

    Hold on kids. It’s gonna be a bumpy ride indeed.

  9. ocmarketblogger

    One thing to note is that many of the people who have managed to “hang in there” thus far and haven’t walked away may be rewarded, and nicely, with the decline of short term rates. Especially the ones who didn’t get raked over the coals when it comes to margin. Funny thing is they could very well end up with rates back in the 4’s. Just an observation.

  10. alan

    Another thought on the 04-09 post tiled “New Season” where IR commented how people who did everything “right” got burned.

    IR has it wrong, these people did not do everything right. The put their house up for sale less than 2 years after purchase. The old school was not to buy unless you planned on living somewhere for at least 5 years. Anyone who gets burned after holding their property for less than 5 years is not doing everything right.

    Another 2 cents….

  11. madhaus

    Loan resets – I got a note from my friendly bank who holds our HELOC inviting us to borrow against it since the prime is down 3 entire points and we are prime minus 1.01%. So our rate is something like 4 something, maybe 4.25. We just paid that suckah off but keeping it open in case we need some bucks.

    So yeah, some people will reset into a lower rate — assuming they have 20% down minimum. If you bought in the last couple of years you very well may not even if you started there! Over on a Silicon Valley real estate blog, someone said they called a loan person and said no one around here is writing loans w/o 20% equity, 25% required in declining zip codes like East San Jose, maximum PITI plus other debt is 45% of income. Jumbo conforming loans coming in at 6.5 to 7% fixed.

    So that means an $800K house requires $108K income and $160K down. How many new buyers can manage that?

  12. Kelly

    I think the biggest problems is that the resets on the option ARM have not really started occuring in big numbers yet. Over at Mish’s Global there is a graph showing that the current reset issues involve subprime loans. The option ARMs start resetting in huge numbers 2010 through 2011. What is coming looks much worse than what has happened so far –

    Here is the link


    When I look at the map and put it along side the graph I really start to fear what is coming. When you hear that 80% of option ARMs can only afford to make the minimum required payments. So many people will be so underwater and future write-offs will be huge.

    1. 80% figure is a Joke

      0% of the people that have Option ARM’s can only afford their min. payments? Where do these JOKES of lies come from? MOST Option ARM’s REQUIRED a fully indexed payment to qualify for the loan. High LTV, NO Doc loans were NOT as prevelant as people here seem to think! Quit making crap up! You are right, the market stinks! It stinks worse when people who NEED to be RIGHT make up garbage like “80% of blah, blah, blah..”! Such statements are ridiculous and lack any basis in fact or credibility!

  13. ocmarketblogger

    To clarify. the people I eluded to in my earlier post are the people who have the “pay option” loan. Many of them had initial Fully Indexed Rates (margin + index) at less than 5%. as the index falls -as they should do since they historically have tracked fed funds- those peoples rates will fall as well and of course since they are in fully adjustable loans their payment will go down as well (even if they have recast) if they have not recast at least they will not defer as much in the mean time. I have consulted with several panicked homeowners desperate for a way out. With values being what they are of course refi is out for most of them but at least when we look at their last 6-7 statements I can show them that their rate is taking a breather. It is nice to see that little glimmer of hope return.

  14. Exit


    Key quote:

    “Option ARMs more than 90 days delinquent increased to 5.4%, up 900% from a year ago. In Countrywide’s $28 billion Option ARM portfolio, 71% of borrowers are only making the minimum payment and 80% of the loans did not require borrowers to verify their income.

    $87 billion of the company’s entire mortgage portfolio is backed by loans in either California or Florida.”

    @Shark – bear in mind that most POA have a call date of 5 years. The recent drop in LIBOR means the borrowers staring down the barrel of 3.3 year call date got a reprieve. Until 5 years are up. Say, 2010 and 2011 – 5 years from 2005 and 2006. If you have alternate hard data to support your contention that “closer to 5%”, by all means, post the link. Until then, what else do we have to go on, but IR’s post?

    1. Masterofdamoney

      Unfotunately, the vast majority of Option Arms are based on the MTA index, not LIBOR. I can only think of 2-3 banks/programs that are LIBOR based right now, compared to 40+ that are based on MTA (with a few COFI, CODI, and COSI thrown in for good measure).

      1. Loans R Us

        You say, “unfortunately….based on the MTA, not LIBOR”! I got news for you bud, the MTA is based on the 1 year CMT…the one year CMT right now is at 1.6% The MTA index is and has been dropping 0.25-0.35% a MONTH since December! Anyone with such a loan will be at 5% or lower by Sept…and because it is a 12 month average, it will STAY lower for months! Anyone with a good MTA margin will be in the low 4’s…basically BETTER than any LIBOR index rate! Unfortunate indeed!

  15. Masterofdamoney

    Orange County at ‘only’ 33% or so might seem weird, but keep in mind that Santa Ana and Anaheim are still in the OC. Those were the ‘subprime’ areas, not much in the way of option-arms there.

    Irvine and many of the nicer beach cities and south OC areas have a much higher concentration, 40%, maybe more.

    The nice areas are in much more trouble… almost every one of those loans is a 100%, no-way-out, balls-to-the-wall foreclosure.

    But you won’t see them really starting to AUCTION/REO for a year or so, earliest.

    1. irv

      Further to Master’s point, I’d love to see a breakdown of mortgage product by home buying segment, the way some of the market inventory numbers are sliced and diced. For example, what would the mortgage breakdown look like if you separated SFR (resales), SFR (new) and condos, and then further divided the numbers based on sub-$500k, $500k-1 mil, $1-2 mil, $2-4 mil and 4 mil and above. Anyone have that kind of detail?

  16. Loans R Us

    Wow! Option ARMS on a “Death Map”! Funny! Do you nervous ninneys know that the avg. margin on the MTA Option ARM was about 2.5%? That means that when the MTA index gets down to the 2’s or even 1’s, the people with Option ARM’s will have rates in the Low to high 4’s! Heck, even people with the higher margins in the 3’s will have rates from the high 4’s to low 5’s! Foreclosures? HA! People with Jumbo loan option ARMS could let their loans go fully adjustable for two YEARS without having to worry about the rates since they have exactly zero better fixed rate choices right now than they do with an Option ARM! If they truly couldn’t afford the non-negative payments, they are toast! In my experience, most people that got them could afford the higher payments but just wanted the lower payments. But a lot of people were qualified for the minimum only though no where NEAR what the readers of a blog like this beleive! Everything to you folks is just always gloomy!

    I’ve got news for those waiting for the “Wave of foreclosures” this year due to ARM resets: Rates on ALL of those loans are going to be the same…or LOWER that what it was when they got them! And will be that way for awhile! You may be waiting a LOOONG time for the “next wave” if it is “not” job-loss related! That aspect of foreclosures I DO expect…but rates will be low and going lower all year on any adjustable! There will be NO “foreclosure wave” due to adjustables!

    1. ocmarketblogger

      suicide loan if you used it for the wrong reason or more commonly, don’t know how they work (even though you may think you do) lots of RESPONSIBLE people have had these loans for years and they are happy with them and they certainly aren’t trying to get out of them now that the rates are adjusting DOWN. the only thing that sets these people apart is they did their homework and didn’t abuse what can be a good thing to impress their neighbors and of course they know not to get out now because they continue to do their homework instead of gladly accepting whatever is spoonfed to them.

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