Sunday, June 15, 2008

The Next Mortgage Crisis

BusinessWeek says option ARM resets will start a new wave of foreclosures in April, 2009.
With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due.

That was the catch to option ARMs; borrowers were offered low initial payments that would recast higher after several years. Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped. According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said....

"Most of the public is thinking that the subprime thing is over, but this is another thing waiting," Bhattacharya said. "The problem for these borrowers is that once you go underwater, it's very hard to refinance, and if you cannot refinance there is very little option for you."

But it gets worse....The loans automatically recast after five years, but many will recast sooner as loan balances hit specific principal caps—typically between 110% and 125% of the initial loan amount. Many of these loans are expected to recast within the next two years, meaning that borrowers' monthly payments will swell to include both principal and interest....

But options are available—even if refinancing isn't possible. Lenders have been working with borrowers to reduce loan amounts and interest rates and, in some cases, simply accept the deed in lieu of foreclosure.

The Mortgage Bankers Assn. says it appears that a growing number of homeowners are avoiding foreclosure by getting help from the Hope Now hotline (888 995-HOPE), a mortgage-counseling phone line backed by lenders and the federal government that gets 4,000 calls a day. Hotline counselors help borrowers negotiate with banks and offer advice on refinancing options. Even though foreclosure rates are rising in California and Florida, they've slowed elsewhere, the bankers association said....

Moe Bedard, founder of in Corona, Calif., a free online forum that helps homeowners negotiate loan modifications, said the larger problem is that banks, many of which laid off scores of loan officers, are so swamped that many borrowers can't get the attention they need.

Many California homeowners, including some with $2 million homes, are simply making their minimum payment, waiting for the recast. Then they plan to walk away, even if it damages their credit, Bedard said.

"A lot of people are just walking," Bedard said. "It's just a business decision; they don't have a lot of skin in the game." But for many others it will be devastating.
Kudos to Anonymous who notified us of this article in the comments.


  1. I thought Congresscreatures were trying to forestall those resets -- am I wrong?

    (Not that I have a lot of confidence in anything those assholes are likely to cook up. Senators Dodd and Dorgan set a hell of an example, eh?)
    -- sglover

  2. Congress is trying to help people currently in trouble work out a solution with their lender. However, Congress is not going so far as to change the terms of legally-binding private contracts.

    Also, Congress only tries to address problems after they are obvious to everyone. Politicians are reactive, rather than proactive.

  3. For those holding out to buy in a decent area, wait until these resets work their way through the system. These majority of these prime ARMs are held by the people living good areas of the metro area. Once the resets hit full swing next year, even supposedly immune good areas will drop, just as quick as subprime infested Hoodbridge and Myasses dropped when the bulk of the subprime loans began resetting late last year.

  4. "Once the resets hit full swing next year, even supposedly immune good areas will drop, just as quick as subprime infested Hoodbridge and Myasses dropped when the bulk of the subprime loans began resetting late last year."

    Except that the prime ARMS are 2 to 3X more concentrated in places like Loudon and PWC than in the immune areas. It makes sense when you think about it. Out thar - where everything is new, everyone bought in the last 5 years, and really went crazy with the crappy ass loans. Closer in, for every person who got a crapper loan there was 1 or 2 or 10 long time homeowners who never got caught up in that nonsense.

    Hate to say it, but once they do reset - whatever drops the immune areas see, the hoodbridges should see drops 2 to 3 times as bad!