Alt A Not such a problem?

[gdcox]

The Financial Times seeks to counter views that ALT A ( which includes most Option ARMs) ‘ tidal wave’ (as some call it) will be anywhere near the sub-prime wave. Any comments. (I think that they are remiss in not going into Option ARMs specifically). They do specifically seek to counter the view that the re-sets are an issues

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Alt-A mortgages

Published: August 10 2008 19:15 | Last updated: August 11 2008 08:36

The idea of just handing the keys back and walking away from a house worth less than the loan made against it tends to catch the imagination. Hence fears that the expiry of initial fixed rates on Alt-A loans could result in another wave of foreclosures, just as the pain in the sub-prime segment appears to be peaking.

Yet there are reasons for cautious optimism. Alt-A borrowers have better credit records than sub-prime debtors, and the pool of Alt-A mortgage backed securities is smaller – about $600bn for loans made between 2005 and 2007, compared with about $1,000bn for sub-prime. Home owners will not necessarily default just because plummeting home prices have left them with negative equity. Research by the Boston Federal Reserve examining house price falls in the early 1990s found that while negative equity was a necessary condition of foreclosures, borrowers also had to run into cashflow difficulties before losing their homes.

Will they? Many of the Alt-A mortgages were made with interest rates typically set at between 5.5-7.5 per cent for those with a fixed period of 12 months or more. These then “reset” to adjustable rates. With wholesale interest rates currently low, those resetting will see little shift in their interest cost. Instead, it is the end of “interest-only” periods that will be most painful. New research by CreditSights out this week, however, suggests principal re-payments kick in within the first three years in only 4 per cent of 2005-origin Alt-A mortgages and in only 1 per cent of those of 2006 vintage. That is a significant ripple, but not a wave.

Still, about a fifth of 2005-2007 Alt-A mortgages start principle repayment after five years, suggesting that uncertainty in the housing market could persist until 2012. Prices should stabilise by then, but at well below the inflated levels of recent years. Those ripples will persist.

[capeman]

This guy is not getting the dynamic info on Alt-A. I personally haven’t seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that…

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph…

[img_assist|nid=8526|title=Revised Alt-A Reset chart due to Pay Option ARMs|desc=|link=node|align=left|width=400|height=227]

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it’s going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

[capeman]

This guy is not getting the dynamic info on Alt-A. I personally haven’t seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that…

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph…

[img_assist|nid=8526|title=Revised Alt-A Reset chart due to Pay Option ARMs|desc=|link=node|align=left|width=400|height=227]

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it’s going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

[capeman]

This guy is not getting the dynamic info on Alt-A. I personally haven’t seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that…

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph…

[img_assist|nid=8526|title=Revised Alt-A Reset chart due to Pay Option ARMs|desc=|link=node|align=left|width=400|height=227]

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it’s going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

[capeman]

This guy is not getting the dynamic info on Alt-A. I personally haven’t seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that…

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph…

[img_assist|nid=8526|title=Revised Alt-A Reset chart due to Pay Option ARMs|desc=|link=node|align=left|width=400|height=227]

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it’s going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

[capeman]

This guy is not getting the dynamic info on Alt-A. I personally haven’t seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that…

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph…

[img_assist|nid=8526|title=Revised Alt-A Reset chart due to Pay Option ARMs|desc=|link=node|align=left|width=400|height=227]

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it’s going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

[(former)FormerSanDiegan]

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

[(former)FormerSanDiegan]

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

[(former)FormerSanDiegan]

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

[(former)FormerSanDiegan]

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

[(former)FormerSanDiegan]

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

[gandalf]

Great clarification, fsd. Sounds exactly right to me. Also sounds like you should be the one writing for the Financial Times…

BTW, I wasn’t aware that Wells was so exposed in the Option ARM segment. I understand they have a problem with HELOCs. What does their balance sheet look like with respect to the Option ARM products? If they originated the products but sold them off to MBS investors, are they still on the hook in terms of their balance sheet? Servicing revenues? Where do they take the hit? What’s their liability?

Up to this point, I hadn’t grouped them into the Wachovia/Wamu set. Looking for comments on why I might be wrong…

Thanks,
Gandalf

[gandalf]

Great clarification, fsd. Sounds exactly right to me. Also sounds like you should be the one writing for the Financial Times…

BTW, I wasn’t aware that Wells was so exposed in the Option ARM segment. I understand they have a problem with HELOCs. What does their balance sheet look like with respect to the Option ARM products? If they originated the products but sold them off to MBS investors, are they still on the hook in terms of their balance sheet? Servicing revenues? Where do they take the hit? What’s their liability?

Up to this point, I hadn’t grouped them into the Wachovia/Wamu set. Looking for comments on why I might be wrong…

Thanks,
Gandalf

[gandalf]

Great clarification, fsd. Sounds exactly right to me. Also sounds like you should be the one writing for the Financial Times…

BTW, I wasn’t aware that Wells was so exposed in the Option ARM segment. I understand they have a problem with HELOCs. What does their balance sheet look like with respect to the Option ARM products? If they originated the products but sold them off to MBS investors, are they still on the hook in terms of their balance sheet? Servicing revenues? Where do they take the hit? What’s their liability?

Up to this point, I hadn’t grouped them into the Wachovia/Wamu set. Looking for comments on why I might be wrong…

Thanks,
Gandalf

[gandalf]

Great clarification, fsd. Sounds exactly right to me. Also sounds like you should be the one writing for the Financial Times…

BTW, I wasn’t aware that Wells was so exposed in the Option ARM segment. I understand they have a problem with HELOCs. What does their balance sheet look like with respect to the Option ARM products? If they originated the products but sold them off to MBS investors, are they still on the hook in terms of their balance sheet? Servicing revenues? Where do they take the hit? What’s their liability?

Up to this point, I hadn’t grouped them into the Wachovia/Wamu set. Looking for comments on why I might be wrong…

Thanks,
Gandalf

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