ARMS adjusting sooner

[bigtrouble]

Have you seen this diary:

Private Banker’s scary prescience

A quote from the linked article:

Lead author Mara Der Hovanesian, who I quoted at the head of this piece, expanded on the story during a revealingly candid 19 minute long podcast.[5] I have transcribed the following passage that occurred at time 07:55 – 08:33 on the MP3 version.
“We don’t know exactly what [option-ARM mortgage loans] they [the lenders] have on the books because they haven’t been required to disclose it. Now that is slowly changing. We’re getting little glimpses now because the regulator is mad. And they’re looking at their audits, and they’ve seen and they’ve talked to the banks and they’ve said, ‘you know, you have to get this stuff off your books, you’ve got to raise your standards and things have got to change.’ And so we’re expecting, in fact, new guidelines from the banking industry’s main watchdog, the Office of the Controller of the Currency, to come out with something.”

Payment option-ARM are readjusting next year, across the banking industry. Just like they did with minimum payments and credit cards last year.

[barnaby33]

I don’t believe we are, “hating on you.” You do however need to substantiate your statements. Otherwise its called heresay. Most of us are here, because we wanted to find ammo for our beliefs. While in a strictly Fargo-esque manner it would be funny if all option ARMS adjusted at once, there are a variety of reasons why its not terribly believable.

• It requires coercive anti-competitive behaviour
• It would be monumentally stupid and cause far more people to be foreclosed on all at once.

If you have info and can divulge enough to be substantiable, then by all means share with the group.

Josh

[powayseller]

From my limited knowledge of loans, ARMs adjust when the teaser rate expires, or when the mortgage balance exceeds a certain amount, i.e. your unpaid interest is high enough to trigger a new amortization schedule. Is it possible that ARMs can reset if the market value of your home drops below the mortgage amount? Even if it is, I doubt any lender would force significant amounts of their loans to go into a delinquent state. That doesn’t help them at all.

[bigtrouble]

I know you guys aren’t “hating” on me, but you are having a little fun. I’ve been around here for a while, just not posting under this name. Its sounds incediary when stated like this, but the industry will be regulating themselves. The loans on their books are much riskier than previously understood. Rich has said that the credit tightening will influence the fall of the market and its timing much more than interest rates. Consider this a possible insight to the way the tightening will go.

Many here cry data! data! and wonder why there isn’t more. That is because the big lenders and mortgage giants aren’t divulging what they know. Why should they? Private investors can have fun making spreadsheets of MLS listings and their individual decline, but the industry giants have CRADLE TO GRAVE information on every loan that they have EVER originated, serviced, pooled, sold to secondary investors, or are part of their MBS securties. Millions and millions of loans. Billions and billions of dollars. When we say the market is overvalued, that means the assets they are holding are not valued properly–this is a huge disconnect and heads will roll. This hasn’t been a real estate bubble as much as a credit bubble. Of course they are going to take action. It just will be sooner, rather than later.

So, get the popcorn ready. 2007 will be an interesting year for schadenfreude.

[Anonymous]

It took me a while – but I think I’m understanding your post better.

The OCC (Office of the Comptroller of the Currency) is concerned over non-traditional mortgage lending products – this is the basis for possible future changes in underwriting guidelines the OCC would like to see implemented.

Based on changes that took place on minimum required payments on revolving credit cards/accounts it is reasonable to assume that the OCC, the Federal Reserve, the OTS and FDIC as well as other agencies might call for more stringent underwriting and management (for lack of a better word) practices with regard to targeted loan programs.

While it is plausable to assume that “guidance” and moral suasion will affect these targeted loan programs offered through governed and/or insured institutions it is highly unlikely, in my opinion, that the terms and conditions of outstanding instruments could be unilaterally modified. Hence, future originations of these types of loans may be impacted but I find it hard to believe that outstanding loans could be at all affected.

Without having done research to back this up I would be willing to bet money that future guidance will NOT be able to affect the terms agreed to at some prior date – which is what the promissory note is all about.

We then have the issue of what percentage of the targeted non-traditional mortgages are originated by institutions who are overseen by the OCC. I would hazard a quess that the majority of these instruments are ultimately packaged into either mortgage backed securities or placed in some type of asset backed instrument which is funded by/through Wall Street.

Again, while I can see a future “tightening” of underwriting standards I can’t imagine the terms of already outstanding loans being affected.

[PD]

Powayseller has a good point. Are there clauses in some of these contracts that state that if the value of the home drops below a certain level, the interest resets or the FB must start paying principle?

[powayseller]

Larry J, I concur with you. It’s too late: the banking demise is in the pipeline, and the OCC rules will affect only a portion of lenders. If they are rules at all; perhaps it will remain guidance only.

bigtrouble, I don’t need data, but some explanation of what you mean would be helpful. We already know that banks are not revealing their loans, the extent of the problem, and their knowledge of the problem. Yet, they continue making these loans. So how concerned are they? Is there a specific event or condition you are referencing?

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

Ho Man , you Guy’s see the Cover of Business week !!!
Just got back from the super market. The whole cover dedicated to it. “HOW TOXIC IS YOUR MORTGAGE” Had this snake wrapped around this house squeezing it.

This should start some PANIC !!!

[bigtrouble]

Powayseller,

You are assuming an high level of intergration between the originations side of the business and the servicing and/or capital markets side of the business. There have been competing camps within the industry, one saying that these exotic mortgages are too risky and a bad idea (back in 2001, by the way), the other saying that everyone else is doing them, so we will miss out on huge short-term profits if we don’t offer them. They have been in a competitive bind, hoping for the best since these are new mortgage products.

Well, the writing is on the wall, and just like the credit card reforms last year affecting all existing credit card debt, the new regulations can potentially affect existing loans.

[powayseller]

How can the new regulations affect existing loans? How could you change the terms of a loan after the loan is made?

BTW, these are not new mortgage products. Just today, someone was telling me that in the late 80’s, ARMs were prevalent. What is different this time, I think, is the looser underwriting guidelines which allow layering of risk. ARM plus no money down plus low FICO plus stated income.

This guy also told me that the number of Poway students applying for payment plans for their $350/yr bus passes, has gone up 4x in the last year. These parents are complaining about their high mortgages and that they can’t come up with the money for the bus pass. More kids live in 3-generation homes, i.e. grandparents, parents, kids, to make ends meet. The money problem is particularly bad in the western section of our school district, west of I-15.

[bigtrouble]

And just to clarify again, the loans affected will not be all ARMS, just the payment option arms, such as the interest only loans, helocs, etc. These are recent and controversial instruments. I think the credit card analogy is best. Those regulations were put into place because the minimum payments reguired of borrowers were so low that the payoff of the balance would take an unreasonable amount of time. They increased the minimum payment required on all existing credit card debt. My feeeling is that the resetting of the payment option arms will be similar–requiring a greater minimum payment for carrying these loans.

Originators of loans almost never actually service the loans. Most originators have a line of credit from a major warehouse lender. Originators then pool the loans they originate and sell them according to the loans particulars, Fannie, Freddie, FHA, prime, subprime. Those loans are then contracted out to a servicer or subservicer who collects the payments and works with borrowers for a standard fee, while at the same time these loans (assets)are packaged up according to risk and sold as MBS securities.

So companies end up servicing loans of other major campanies, depending on their expertise. There is a lot of outsourcing of subservicing rights. The whole industry is very mutually dependent. Additionally every state has different laws and timelines regarding foreclosure procedures, judicial, non-judicial, number of days, original documents,etc. The industry is much more complicated than what most individuals experience of qualifying for a loan, and then making monthly payments. Your paper passes through many, many hands, belonging to many different companies, used for many different purposes. Thus, hypothesizing that the guidelines will only affect a small portion of the companies, and would be voluntary may be a bit naive.

[powayseller]

bigtrouble, John Dugan, Comptroller of the OCC, gave a talk about the need for interagency mortgage guidance, just 3 months into his position. He is concerned about the high concentration of commercial and residential real estate loans, as well as the lax lending standards.

Commercial real estate lending: In the 2005 survey of lenders, the OCC found that lenders had relaxed standards of LTV and debt service coverage, longer maturities, and lower collateral requirements. One third of national banks have commercial RE holdings equal to 300% or more of their Tier I capital.

Residential real estate lending: In 2004, half of all mortgages were I/O. By H1 2005, half of all mortgage originations were payment-option ARMs, a higher level of risk than I/O loans. By the time of his talk, end 2005, half of all mortgages were piggyback and/or reduced doc. This layering of risky products makes the ultimate loan even more risky than the sum of the parts. (“Tthe whole is greater than the sum of the parts” is a law of nature.)

Most option-ARM borrowers, both at the high and low end of the FICO score spectrum, make the minimum payment on their mortgage each month. Half of the least credit-worthy borrowers have higher loan balances resulting from accrued interest.

Dugan gives an example to show that an option ARM’s payments will go up 50%, even if interest rates REMAIN THE SAME. A 5/1 ARM at 6% interest goes from $1600/month to $2500/month at the beginning of year 6. If interest rates rose to 8%, the payment would double to $3166 in year 6. The borrower won’t qualify to refinance if interest rates are high or the home’s value has decreased. For this reason, option ARMs are the riskiest product out there.

These concerns prompted the interagency guidance, which seeks to tighten underwriting standards, and improve borrower disclosure and portfolio risk management.

Dallas Fed Summary of Guidance Document.

The guidance was written because the government is concerned with option ARMs, the riskiest of all loans out there, because of its negative amortization feature. The second concern is lending to increasingly subprime borrowers; in other words, people who don’t qualify for 30 year fixed rate loans are qualified for the much riskier option-ARM! Does that even make sense? They are also concerned that lenders are not providing adequate disclosure of increased future payments.

The guidance requires that lenders evaluate a borrower’s ability to pay AFTER the teaser rate and intro period expires. The fact that they are not already doing this just boggles the mind!

This is where it might have some teeth: institutions which make collateral-dependent loans (the borrower must rely on refinancing or sale of the house after the amortization period begins) are subject to criticism, corrective action, and higher capital requirements.

To whom will this guidance apply? It was written jointly by The FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration. So it would apply to all federally chartered and insured (NCUA, FDIC) banks, thrifts, and savings? But not to private lenders, such as Option One, right?

What percentage of loan volume would be exempt from this guidance?

[bigtrouble]

Lenders will have to follow the rules. These exotic loans products could very well be ruled “predatory lending”.

[bigtrouble]

With the bloodbath in the subprime market in full swing, can I just say, I told you so?

They can, and will, take care of those payment option-arms on there books this year. It is being directed from the MBS market. What they bought is much much risker than identified.

[JWM in SD]

Yeah, I have to admit, you called it alright. Now if we can get this site to be a housing bubble site again instead a bunch of pansies fretting over foot traffic at 4closure ranch.

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