The Option ARM problem has not gone away. It serves as a testament to the denial of the lending industry, and it is the textbook example of extend, amend and pretend.
Irvine Home Address … 11 MILLBRAE Irvine, CA 92602
Resale Home Price …… $749,900
I know that the prospects weren’t all that good
But they improved, and I’d have thought that you could
Have strived for that something we all have deep inside
Not let it vanish, along with your pride
Now with the aid of your new walking stick
You hobble along through society thick
And look mesmerized by the face of it all
You keep to the gutter in case you fall
Run of the Mill — Judas Priest
Option ARMs revisited
In case anyone thought The ARM Problem had simply gone away due to accelerated defaults, it hasn’t:
December 4, 2009 12:46 PM CST
than $200bn of outstanding pay-option adjustable-rate mortgages (ARMs)
originated and securitized from ‘04-’07, according to market commentary
by Moody’s Investors Service this week.
This sector shows “dismal” performance, with more than 40% of
borrowers 60 or more days past due on payments. And many of these loans
have yet to experience a recast event, when initial minimum monthly
payments jump as much as 60%, according to sources interviewed by HousingWire for an upcoming issue.
“Even though borrowers with Option ARM loans have the option to make
monthly payments typically lower than the accruing interest on the
loan, many borrowers are choosing a different option–not making any
payment at all.”
Moody’s said the performance is comparable to subprime, despite the
trend of more acute negative equity among Option ARMs than subprime.”
It is not surprising that 40% of Option ARM holders are currently in
default. What is surprising is that there are still $200,000,000,000 in
outstanding Option ARM loans. This is the classic example of kicking
the can down the road, and here is the reason why:
“Negative equity is a key driver of weak performance — as well as a more predictive measure of default than unemployment — particularly among Option ARMs. Modifications would
have to be applied aggressively to have any lasting effect and keep
borrowers paying on their mortgages, Moody’s said.
As I demonstrated in the post Cure Rates, once people go underwater, they are far more likely to default. Lenders are praying the California bubble markets do not get pushed over the edge by a flood of foreclosure inventory, so they are pretending the $108,000,000,000 problem here in California will just go away.
High defaults might be mitigated only by as extreme a method as
principal forgiveness. Moody’s recommended a term extension to 40
years, significant interest rate cuts and some principal forbearance to
keep borrowers’ cash flowing.
In other words, it is hopeless without lenders committing the ultimate sacrilege in lending: forgiving principal:
“There is little hope that most of these [delinquent] borrowers will
start making payments again if no principal is forgiven,” Moody’s said.
“Forbearance does not eliminate the obligation to repay the loan
principal, it only delays it. And many delinquent borrowers are
potentially so far underwater that it would take close to a decade for
them to attain any positive equity in their home.”
The delinquency rate of Option ARMs is expected to rise as a wave of
these loans recasts after the initial payment period, according to
recent market commentary by Standard & Poor’s.
“Option ARMs are the most vulnerable to quick payment increases
because of the low payment options they offer borrowers,” S&P said.
“Upon full recast, option ARM borrowers may experience sudden payment
increases to varying degrees depending on the payment options they
chose to exercise prior to the recast.”
The recasts have not occurred yet, and these loans already have 40% delinquency! How can that be good?
As I noted in The Great Housing Bubble:
Equity is made up of several component parts: Initial Equity,
Financing Equity, Inflation Equity, and Speculative Equity. Each of
these components has different characteristics and different forces
that govern how they rise and fall. It is important to understand these
components to make wise decisions on when to buy, how much to buy, and
how to finance it. Failing to understand the dynamics involved can lead
to an equity graph like the one for the peak buyer who purchased at the
wrong time and utilized the wrong terms. Nobody wants to suffer that
Figure 8: Peak Buyer, No Downpayment, Negative Amortization Loan
The default rates on these loans will reach 100%. The only hope for these borrowers to stay in their properties is a loan modification, and that hope, IMO, is one of a series of Bailouts and False Hopes that ultimately serve no purpose other than to get borrowers to make a few more payments.
Irvine Home Address … 11 MILLBRAE Irvine, CA 92602
Resale Home Price … $749,900
Income Requirement ……. $154,568
Downpayment Needed … $149,980
20% Down Conventional
Home Purchase Price … $750,000
Home Purchase Date …. 12/28/2004
Net Gain (Loss) ………. $(45,094)
Percent Change ………. 0.0%
Annual Appreciation … 0.0%
Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $3,206
Monthly Cash Outlays ………… $4,220
Monthly Cost of Ownership … $3,160
Baths 2 full 1 part baths
Size 2,477 sq ft
($303 / sq ft)
Lot Size 2,502 sq ft
Year Built 2001
Days on Market 4
Listing Updated 12/2/2009
MLS Number S597447
Property Type Single Family, Residential
According to the listing agent, this listing is a bank owned (foreclosed) property.
Gorgeous Property in Prestigious North park. Beautiful home has Gourmet kitchen w/granite counters & stone backsplash. Huge Master Bedroom w/Fireplace and Retreat Room. Jacuzzi Tub in Master Bathroom. Lower level has tile flooring thru-out with the exception of vinyl in the laundry room. Custom Plantation Shutters & Vertical Blinds. Front patio and a small fenced, private rear yard. 2-Car Garaged. Guard gated community. Walk to Association Amenities-Pools, Spas, Parks, Gazebos, Award Winning Schools & Shopping/Restaurants.
I am convinced that Californian’s really believe that a mortgage is something people work to manage its growth. Mortgages are supposed to get smaller; people are supposed to pay them off. Even the “treading water” mindset of interest-only rests at the cusp of a Ponzi Scheme, but doesn’t cross the line. Day after day I find people who have increased their mortgages; some by a lot, and some by a little, but everyone is doing it. It isn’t hard to see why houses are so desirable.
The previous owner of today’s REO managed to obtain a $720,000 first mortgage and a $90,000 HELOC in January of 2007. That didn’t work out so well for the lender…
Recording Date: 10/15/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Recording Date: 07/07/2009
Document Type: Notice of Default
(People with access to property records will get the joke about Jeopardy.)