The Housing Wave of the Future: Two Main Mortgage Tsunamis.
We are only in first stages of this mortgage mess. We are point 10 on the horizontal axes. We’ve all been hearing about people refinancing and getting out of these risky mortgages trying to buy extra time. Well the IMF has come out with another reset chart and a fantastic paper that gives you an idea of the overall world credit markets. What does this new chart show us? Well take a look below:
First, you’ll notice that the subprime market will keep on having problems up until 2009. But an interesting new wave emerges with this new data. Now we are seeing a growth in Option adjustable mortgages; that is, mortgages where you can pay even less and have your mortgage balance grow! So clearly if you can put 2 and 2 together, many people refinanced out of toxic subprime mortgages (if they could) into option mortgages and all those late comers to the housing party substituted subprime loans for option mortgages. Jumping from one frying pan to another! An option mortgage is just as bad as a subprime loan, possibly even worse. First, these loans give you various payment options. At the bare minimum, you have the ability to pay less than the interest on the loan. How can that be? Well, any interest is simply tacked onto your balance so when your mortgage fully amortizes, you will have a larger mortgage. Call it mortgage appreciation. It is another wonder of the financial engineering that we are now living through. As you can see from the chart above, this wave doesn’t fully expand until 2010 through 2012.
The two waves of the future. If we are already having trouble dealing with the ramifications of stage one of the subprime reset bomb, what do you think will happen in Q1 and Q2 of 2008 when we hit the peak subprime stages?
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23 Responses to “The Housing Wave of the Future: Two Main Mortgage Tsunamis.”
But didn’t I read today that Countrywide is allowing many thousands of borrowers to refinance their resets under new terms? Will this have any effect?
Oh boy – noodle around the web today, including sites listed by the good doctor (patrick.net, housing panic, etc., minyanville, mish shedlock), for some very well reasoned opinions about this. In the days to come you’ll see commentary from a number of sources, and how it might dovetail with the bill that Congress (Frank) proposed today, but there are just tons of technical questions that don’t even begin to address the systemic ‘moral hazard’ of such a refi program?
What about the cash out borrower? Does he get forgiven for the extra money he took out?
What about other liens (2nd mortgages, mechanics liens, NOD’s, etc.) – do they get written off or do they stay? Then what about clear title to the property?
Who pays for the ancillary fees? Title insurance, escrow – and the loan officers? How do they get paid? What about the prepayment penalties, past due amounts? What loan amount gets used? A higher one to account for fees? A lower one to discount for the shenanigans previously committed?
Maybe Mozilo could use some of the hundreds of millions he made in sold stock to cover the costs…
Jubak at MSN has a good description of some of the issues confronting modifying loans, on how it affects the bundles of securities – how does CFC address that issue? And what about the basic premise that CFC put the homeowner in the junk loan to begin with – how many of them want to deal with the same company again?
How does the borrower account for qualifying now, if they did a stated income loan before?
There are even more, but you get the drift. Each ‘solution’ just piles new problems on top of the old ones.
Great site!
My husband and I lost about $700,000 in real estate this year. On my blog, “Overcoming Real Estate Losses,” I use humor and optimism in the face of this major financial loss. To get all the intimate details go to
http://whinecountryrealestate.blogspot.com/
Your analysis of the option ARMs is faulty. The vast majority of Option ARMs are not subprime. To say people are going from subprime to Option ARMs is not right.
What is right is even scarier. Option ARM payments increase in two instances – a pre-set time period established in the mortgage – typically 10 years, but it can be sooner. They also go up, and this is the really scary part, when the unpaid balance reaches a certain loan to value, i.e. 110%, 120% depending on the loan.
These borrowers that have been only paying the minimum due interest only negative amortization portion are going to find themselves having to make the fully amortized payment. The “option” is going to be removed.
This can also happen if the lender determines a market is losing value and readjusts the LTV based on an appraisal only. This adjustment is also true of home equity lines.
Exit, you are buying into the snowjob. Anyone can refi at anytime. Always been that way. Countrywide always calls people to refi. What is different? nothing.
CFC did NOT announce they are forgiving pre pays or giving free refis or below market rates. Standard refi for the resetting mortgagee’s – that is all they are offering (and they make $$$$ on every refi as always).
@HelloKitty – I see why you think I’m ‘buying into the snowjob’ – of course CFC is just staying the course and calling borrowers to refi, as they’ve done for years. The point I was driving is that, if it is supposed to be a “solution” to the problem, it’s not – there are too many loose ends. Whether Joe and Jane Consumer see that is a different story, as the PR hacks will spin and Tangelo gets to use soundbites to advance his cause – to increase that lovely orange glow (now the color of the Socal sky).
I disagree with your assertion that anyone can refi at anytime. In case you weren’t aware, loan products have left the scene of the crime. For those who need stated income, you better have tons of equity and smoking good credit -and be prepared for the rate. But if you don’t have equity – can you say housing bubble? then it doesn’t matter how much money you make or how high your FICO score goes. You CANNOT REFI.
If those are the borrowers CFC is targeting, then the slew of questions I initially posed DO apply – and therein lies the question, who pays? There’s no room in the loan if the value isn’t there – does CFC just eat it? Then what about their stock valuation? And the issue of how modification skews the MBS becomes an issue. Again – pointing back to your comment – business as usual, it’s really just a PR ploy.
@Nigel Swaby
I think you’re agreeing with the Doc. His reasoning isn’t faulty, but you do help clarify it even better. The truth is scary. And 10 year resets are the province of World / Wachovia – 5 years is the norm for CFC, WAMU, Indymac, Downey, First Fed, and the legion of Wall Street firms. Indy was nearly alone on the 110% reset cap, which they began amending in 2005. The bulk are 115%, and a few like WAMU and Wachovia were primarily 125% all along.
It’s the press reset button for valuation that is even more troubling. Let’s see if Congress outlaws that provision…
hello kitty:
exit was obviously referring to the Countrywide press release that noted it would offer a “comprehensive home preservation program to reach out to borrowers at risk of default.â€
People at risk of default are NOT “anyone [who] can refi at anytime.”
Thank you.
You may return to your kool-aid now…
Oh, don’t worry, by then the FDIC and Barney Frank will be proposing that option terms be legislated to be indefinite, turning the banks into landlords for these properties.
Option ARM payments sound a lot like a credit card payments where you just have to make the minimum monthly payment and any remaining interest gets added to your balance.
Why is it that no one is talking about the pending “option arm” debacle. With maximum negative amortization allowed on the Note of 110% to 115% of the original loan amount and falling prices this is going to be the true “second wave”.
Peter Heinen
Loan Officer (25 years)
You guys are right. The piece above does a good job of addressing the catastrophic picture we stare at every day: biting our nails. However, the graph is misleading for the very reasons cited above. The graph seems to imply thaat this is a static, left foot, right foot, type of progression which is not the case AT ALL. This is a dynamic house of cards where equity is evaporating and the clauses implementing resent in response to declining values will hit default like a nuclear explosion: not a tsunami. Value will be vaporized faster than you can count its collapse. What you don’t see in the graph is the withering of the baby boom who MUST SELL regardless of value because of infirmity or death. This generational hand-off is accelerating rapidly like a wicker basket parade into the incinerator. Most of these folks are on FIXED rate mortgages not even shown in the graph and these inevitably will default too and in high number with vaporizing equity and NO qualified buyers. The stance of the baby-boom has been to generally be unprepared and housing is no different: almost all baby-boomer retirement is in home-equity and that home-equity is going over the cliff. You are already seeing the exodus of those retiring with any wealth to their names and they are starting to leave the country in droves. This will accelerate. Also, do you see your neighbor with the 5% fixed loan for 500k continuing to pay when his market value is 300k? People take intelligent losses all the time whether they be corporations or otherwise. This will not be different. The US will be left with an incredibly young, broke and foreign population and only two things emerge from that formula: totalitarianism and war.
It is clear that the Option ARM is a more “humane” (read sneaky) method for large banks to repossess FBs homes. Instead of an home “borrower” suddenly see their monthly payments spike (which they cannot afford) causing them to lose their home, they can keep the same payments but soon see their home loan is 10-20% above comparable selling homes. Either way, the bank gets the keys.
I pray that even we Americans cannot be this shortsighted.
John you seem to think that babyboomers are at the point of being forced to sell. I disagree. Baby Boomers are wiser than both of us. They have lived through real estate up and downs. They have seen homes appreciated 500% over their lifetimes. It may take more time than they would like but they are not going to sell their greatest asset in the worst market.
Also how many people really believe that a $500K house will fall to $300K? Seems to me that you may want to get a prescription for anxiety.
john great comment; PMI companies are going down AND THEY HAVE NOTHING TO DO WITH SUBPRIME, they have been treating us for colon cancer (subprime) and we had a heart attack (devaluation); 5 houses for every borrower and getting worse.
The builders are next, any bank holding construction loans with them, all worthless land and large money attached to it.
This devaluation problem will work itself out in about 5 years, but THEY WILL BE VEDDY VEDDY BAD YEARS…….the taxes won’t get paid on all the foreclosures (communities get hurt, pension funds are full of this stuff)
(“A” PAPER IS GETTING READY TO HAND BACK HOUSES THAT THE BORROWER OWES 500,000 AND IT IS WORTH 300,000)….the banks can’t handle the reserve problem coming hourly at them…..
the government will have to spend 10 trillion to keep from the big “D” and the payback will be that only 5 banks will be allowed to do mortgages……….again fixing that awful subprime problem, ******PEOPLE THOSE SUBPRIME PEOPLE WEREN’T DUMB ——IF THEY COULD HAVE SOLD THEIR PROPERTY THEY WOULD HAVE, good borrowers are next, subprime was just the weakest and first to fall, …………..the real adjustment problem hasn’t even started yet, next year is the one………………..ouch…………..hope I am wrong as hell………………
Ok, so if the sky is truly falling what is the solution? We have obviously worked ourselves into a mess. How do we untangle the web? What real advice can we offer to people in the middle of the tsunami(s)?
Thanks for frightening me further about the housing market. 🙂
Honestly, I have a fixed mortgage now and am so glad I made the switch. I was in an interest-only setup and got out before it got too bad. Lenders were just going back to the well one more time before it dried up, hoping for yet more profits. The new staff they hired were just expendable. That’s harsh but probably true. They will just keep going after what they see as the quick-fix, high profit mortgages they’ve always sold at the expense of unwise consumers.
John Locke – that is one of the best comments I’ve read on this blog. I’m 40, I’ve had a lot of long after-dinner talks with my 70-year-old father. Retired Navy admiral, tons of medals, founded 2 successful companies, great father to me… and yet he tells me he’s scared for my generation and my daughters’. He jokes that he’s afraid that my parents’ house in the Wash D.C. suburbs will be worth very little “by the time your Mom and I are gone”….
I live in L.A. (renter) and there is a huge population of people here living beyond their means. I used to think that is particular to this area. And while I think L.A. is worse than most places, I’m realizing this country is living in debt, beyond its means, and we are getting poorer. Jobs being outsourced, huge corporate financial scandals, etc….
I work my ass off so that my taxes can pay for gov’t pork programs, medical care for emergency room visits by illegals, and to bail out cigar-chomping fatcats who get caught with their hands in the proverbial cookie jar.
The post-war generation that built this country is seeing its hard work & progress obliterated so quickly it’s frightening.
@mike:
Mike said:
Also how many people really believe that a $500K house will fall to $300K?
Seems to me that you may want to get a prescription for anxiety.
Can’t happen? This already has happened. There was an auction by a home builder in Manteca recently. Homes that sold in the neighborhood of 600k a few years ago were auctioned off at 350k. Existing owners were furious.
These comments are well thought out (except Kool-Aid kitty)! The bottom line is that the mortgage and real estate industry gave the consumer what they thought they wanted while they all booked their killer bonus for four years. We may be on the front end of the worst single family real estate bust in history. If any of you are old enough, please remember California real estate from 1989 thru 1994. Some try to exlplain that on with “it was all due to aerospace” which was 1/10th of the issue. It was your standard greed run on real estate that ran out of gas with the gilf war. That real estate debacle was primarlity financed with “normal” loans. This time……………
“how many people really believe that a $500K house will fall to $300K?”
Already happened to many properties in FL & Vegas…..check out the businessweek article on folks who lost $150-200K of equity in just a few months…….and this is early in the housing “correction”, “bubble bursting”, “downturn” (you can pick the term)……..Why is it that people have no problem watching houses appreciate 300% in just few years, but a 40-50% decrease seems outlandish?
Three months to get Notice of Foreclosure, Three MORE months to get it thru the courts, TWO additional months to get it on the market. Thus, even though we are at “10” on the horizontal bar, actual foreclosed houses on that scale are at “2” at best.
Lots more fun to come!
repost with additional comment:
dano, in addition to your listed delays between when the borrower and bank jointly ‘give up’ and start down the foreclosure path (8 months to market, your estimate), it occurs to me that in many cases there will be a delay between when the reset hits the fan (and the house is not really ‘affordable’ based on income) and the time when the borrower really gives up. Consider that many folks who bought are the ones in disbelief that they won’t be able to refi if they can just hold on a bit longer. In that case, they will borrow on credit cards, extract 401k money, scrimp on spending, maybe even underwithold taxes until the end of the calendar year (to avoid penalties) or even until April filing (when the money is due). Lots of tricks to pull, if you are desperate and/or in denial. This path may not be the one of choice for the 100% LTV flippers who had no skin in the game, but it may well be the choice for many others.
I look at the two sets of peak resets: the first being the subprime and alt-A, lasting through the end of 2008, and the second being the option ARMs. All of these are likely to see high percentages of defaults, for different reasons that have already been discussed. Since the second larger wave of option ARMs have a high likelihood of high rates of default (esp for places such as southern California, where it was the only way that buyers could take on the size of the debt required to purchase a ‘modest’ 600-900k home and fit it into their monthly cash-flow), and since that really only hits in 2010-2012, and then factoring in the delays you and I have both listed, it would not surprise me to see the true bottom in the market not appear until after 2012, all things considered. That’s 5 years away….. When the ball really starts rolling downhill next year and the year after, due to the huge overhang of REOs and spec home monetization ‘fire sales’ by the builders (who in OC can often drop prices to 50% of peak levels and still break even, due to low land cost), THEN we will see the effect of constrained borrowing (all fully-doc’d, financed at 30yr fixed, and fitting within budget more reasonably) ability of the pool of potential occupier buyers, together with cash-flow profit investment analysis (not assuming capital gains, but requiring profits from rent after factoring all expenses and depreciations, etc.), as setting a 50%-off-peak ceiling for maximum offer prices. We may likely see overshoot to the downside as there will be panic, fear, and other emotions coming into play. All told, there is no reason to even consider buying in places like socal for at least 3-5 years, on a value basis. Naturally, people often have other reasons, but in times of fear they will tend to be more fiscally conservative.
Addition: Implicit in the above are the LTV distribution and the distribution of ‘loan payment percentage of income’ that the bulk of the last few years of these three loan categories comprised, for areas such as socal. In summary, many of the loans were near 100% LTV and alt-A or option ARMs. This information is significant in order to appreciate the consequence of the resets, and the percentage of people who will have no options available other than foreclosure, here in socal. I anticipate that number being far higher than has even been floated as a trial balloon in the MSM.
I will add that anecdotally, all the buyers from that period that I have met had no ‘inflated cash-out equity chit’ to roll over from a prior sale, to fund a move-up; rather, these were first time buyers – hence they all went nearly 100% LTV and did options – and cannot afford the resets coming – but bought nonetheless, having been fed a diet of complacency concerning risks and greed concerning compounded gains stretching to infinity.
If Mike believes that the Baby Boomers are wiser than the rest of us he may be in for a shock. Nearly half of the Baby Boomers have less than $70,000 in savings. That’s about two years of hard living in a trailer park. If they’ve chalked up 500% increases in their homes they better sell quickly, they’ll need the cash!
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