But option ARMs aren’t the only problem here. Traditionally amortizing ARMs have yet to reach the peak of their resets, too. Look at that great Credit Suisse chart again. It looks like resets will peak somewhere near the start of 2012.
The questions there are what will interest rates be then and how many will be adjusting up from artificially low teaser rates. If interest rates are significantly higher (and they’ve bounced off their lows recently)—look out. I just don’t know the answer to how much higher regular ARMs will reset, but I don’t think I’m going out on a limb to say the increases will be significant.
I dig that McClatchy namechecks good journalism by another publication, in this case a story by Audit favorite Mara Der Hovanesian:
In a prescient cover story on Sept. 11, 2006, Business Week magazine labeled option ARMs “nightmare mortgages” and warned that it “might be the riskiest and most complicated home loan product ever created.”
And this is excellent context:
Subprime mortgages caught the nation by surprise because of their short two-year resets to higher interest rates. Option ARMs reset over a longer horizon and thus are a slowly unfolding nightmare.
And it’s also great that McClatchy points out that we don’t know where this garbage is now:
Most were sold into a secondary market, where they were pooled with other mortgages and sold to investors as bonds or securities. The number of these loans is quantifiable, but banks aren’t required to disclose how many such loans they wrote. It’s unclear how many option ARMs remain on banks’ books and weren’t sold to investors.
Let’s close with this quote from McClatchy:
“They’re probably going to default at a rate that makes subprime look like a walk in the park,” warned Rick Sharga, senior vice president for RealtyTrac, a foreclosure research firm in Irvine, Calif.
Good efforts by both. “Green shoots” aside, it’s pretty obvious that the economy isn’t going to recover until the housing market bottoms out. Good luck with that.
This ride ain’t over yet. It’s good to warn the passengers.
There is an important part of this story you are missing. Option ARMs automatically recast when the accrued interest and principle reach a maximum limit, usually somewhere between 110% and 125% of the loan amount.
Depending upon the interest rate and whether or not the borrower was making at least the interest payments, this recast could come much sooner than 2011. All the people who have chosen Negative Amortization payments will likely be recasting this year!
Their ability to refinance is constrained by the availability of credit (which is tight), their ability to make fully amortizing payments (which is probably low) and the loan-to-value ratio (which is extremely high since their houses have been depreciating).
In short, most of these Option ARMs are dead men walking. This year we will begin to smell the rotting flesh. Next year we will discover the corpses. The year after that we all begin suffering from disease.
And we haven't even discussed the impending Commercial Real Estate crisis which will strike later this year. Ladies and Gentlemen, get ready for a lengthy, double-dip recession.
#1 Posted by R. Miller, CJR on Fri 26 Jun 2009 at 06:55 PM