Notice that at its peak, the Option ARM wave will be slightly smaller than the subprime wave of 2007-2008. The subprime problem has past.
CNBC discusses the problem:Thousands of American homeowners are starting to see their monthly mortgage payments skyrocket, dealing a fresh blow to the already shaky housing recovery.The question is how many of these Option ARM mortgages have already defaulted?
The widely feared reset of thousands of option adjustable-rate mortgages—where both interest and principal payments rise sharply—is already leaving many homeowners struggling to keep a roof over their head. ...
Terms of the loan usually allowed the borrower to make low monthly payments initially—sometimes by just paying interest only.
But as the terms of those mortgages now readjust, homeowners are facing much higher mortgage payments at a time when the value of their house has plummeted and many are out of work. In some cases, homeowners who chose a very low starting interest rate have actually seen the overall amount of their mortgage increase—known as negative amoritization—putting them even deeper in debt.
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Have they tried to account for loans that have either already foreclosed, or been refinanced?
ReplyDeleteI would think that only a small percentage would fall under these categories.
One other thought - some of the Option ARM mortgages have already reset. There was a story some months ago about how when the LTV falls to a certain point that the reset can occur sooner than 5 years.
ReplyDeleteFirst, I'd like to know how current is this graph. For example, how many of the homeowners counted in the data still have a mortgage and did not vacate their homes due to foreclosure, etc.? How much more distress will the Las Vegas real estate market encounter?
ReplyDeleteSecond, what is the distribution by region or metropolitan area of the data? Is it proportional to the population size of each region or metropolitan area?
"The question is how many of these Option ARM mortgages have already defaulted?"
ReplyDeleteDiana Olick says 49% of the option arms (3/4 of which are located in AZ, FL, CA, & NV) have already defaulted.
My understanding is that most or all of these Option ARMs can be moved into fixed-rate mortgages. So why is this a big deal? As soon as people see their rates go up, they will make the move to avoid foreclosure.
ReplyDeleteThe articles I have read so dar on this topic suggest that historically, only about 70% of homeowners with resetting Option ARMs will actually do this. This means that of the $2 trillion in option ARMs, about $1.2 trillion will default.
Anyone -- please confirm. Thx.
OK, there is a serious problem here in understanding the difference between a "reset" (change in interest rate) and "recast" (forced into full amortization).
ReplyDeleteThe payment shock from CR above is based on RECAST, not reset. Most Option Arms go through resets every year, due to it being an ARM.
The RECAST is the real problem when the loans go from negative amortization to fully amortizing. Low interest rates have delayed the recast to the stated loan recast. Most have an accelerated recast clause that causes the loan to recast to the fully amortized over the remaining life of the loan when it hits a loan cap, OR they all recast at a specified date, usually 5, 7, or 10 years.
Most have NOT hit their recast point, though with rates at this point, they are fully 30 year amortizing. In some cases, the recast over remaining life will only shorten the amortization period from 30 to 25 or 23 (only if they are already amortizing), but that doesn't mean the shock won't be relatively large (plus 25% give or take), these will just be the smallest of the recasts. Remember that every year, these also reset to prevailing rates, so that won't be the last reset. The largest are ones that are negatively amortizing despite the low rates and will experience a significant payment shock of >50% or more. There is probably an even distribution of payment shocks reflected in the graph above.
Short answer: it isn't as simple as one might think, but it's probably as significant at it's nadir as one can imagine.
"Anon said...Diana Olick says 49% of the option arms (3/4 of which are located in AZ, FL, CA, & NV) have already defaulted."
ReplyDeleteYep - heard that from Ivy Zelman (the creator of the infamous credit suisse reset chart), too. She said between the foreclosures, occasional sales, refis and modifications, no single wave will ever come in as big as expected.
For example, in earlier charts, that spike in 2011 used to hit the high water mark at 27Billion. Now thanks to foreclosures/sales/refis/mods, it now spikes at under 20 billion. When it "hits" next year, it likely will be at 15 Billion or less.
Bottom line, thanks to early defaults/foreclosures/sales/refis & mods, we are pretty much at the 1/2 way point now, regardless of what the chart officially says.
"My understanding is that most or all of these Option ARMs can be moved into fixed-rate mortgages. So why is this a big deal? As soon as people see their rates go up, they will make the move to avoid foreclosure."
ReplyDeletebecause you can only refinance if you have equity. I'm not sure what the minimum threshold is, but I'm guessing in this environment at least 10%. The problem is that most people don't have that so they CAN'T refinance into a fixed rate mortgage.