ARMs and foreclosures

[Eugene]

Found an interesting article that analyzes outstanding ARMs and attempts to predict the number of reset-based foreclosures. Don’t remember seeing it here.

http://www.firstamtrust.com/pdf/20070154%20reset%20preso%20060607.pdf

Some results

* They see 200,000 active ARMs in San Diego county. (Which is interesting, compared with average annual sales activity of only 50,000 houses/year at the peak) I’m not sure if this number includes those ARMs that were already fully reset, or only those that reset in 2007 and beyond.

* Assuming 5% market decline between end of 2006 and 2008, they predict 40,000 reset-based foreclosures combined over all reset years (from 2007 through. 20% market decline will double that figure.

* Only ~10% of them are subprime. (They define subprime as ARMs with initial interest rate above 6.5%) Bulk of foreclosures comes from ARMs given to prime buyers with initial “teaser rates” of 2%-4%.

[Ex-SD]

My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”

Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable

I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”

[Eugene]

A question to knowledgeable people.

What does a typical 2006 sub-2% “teaser rate” ARM look like? What’s the reset trajectory?

Is it true what that guy says, that those loans start to reset quickly (within 6-12 months)? If so, how long does a full reset take?

How many of those are negative-amortization loans that are not due to reset for 5 years?

[HLS]

What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson

There is isn’t an exact “typical” subprime loan, that was originated 1n 2005-2006.

If somebody had a 5% start rate fixed for 2 years with an interest only minimum payment, their first rate adjustment after two years (2/28 or 2/38) could be 2 points, making their rate 7%. In itself, that would be a 40% jump in interest payment.
However,
It would probably recast to a 28 year amortization, making the payment $2039 (63% higher)
OR
a 38 year amortization making the payment $1883 (50% higher)

This payment would only be in effect for 6 or 12 months max, before it would adjust higher again.

Nobody will have an increase that is 100% or higher, nor anything that would be much lower than 20-25%.

The sad thing is that these loans were never intended to be a long term loan, but a short term band-aid loan.
Unfortunately the scum of the mortgage industry didn’t explain it to borrower’s that way.

As of today, there are still more than 80% of subprime borrowers paying their loans. I expect this to change for the worse in many areas as rates adjust higher and folks simply cannot qualify for a refi.

[Eugene]

“What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson”

I’m not talking about subprime loans.

If you look at that article, on page 31 it says that 1/3 of all outstanding ARMs in San Diego County (prime and subprime) are “red rate group”, with initial interest rate below 4.0%. The question is, are all these loans neg-am, or was there anything else going on.

[HLS]

Sorry,,
I hadn’t read the article before answering your question.

Neg Am loans are also called ARM’s.. Pay Option Arms.(POA’s)

I’m not aware of any I/O loans that were sub 4% originated in 2005 and after….If there was anything like that prior to 2005, it would have likely already adjusted upwards.

I’ll check the article later.

[HLS]

Sorry,,
I hadn’t read the article before answering your question.

Neg Am loans are also called ARM’s.. Pay Option Arms.(POA’s)

I’m not aware of any I/O loans that were sub 4% originated in 2005 and after….If there was anything like that prior to 2005, it would have likely already adjusted upwards.

I’ll check the article later.

[HLS]

Sorry,,
I hadn’t read the article before answering your question.

Neg Am loans are also called ARM’s.. Pay Option Arms.(POA’s)

I’m not aware of any I/O loans that were sub 4% originated in 2005 and after….If there was anything like that prior to 2005, it would have likely already adjusted upwards.

I’ll check the article later.

[HLS]

Sorry,,
I hadn’t read the article before answering your question.

Neg Am loans are also called ARM’s.. Pay Option Arms.(POA’s)

I’m not aware of any I/O loans that were sub 4% originated in 2005 and after….If there was anything like that prior to 2005, it would have likely already adjusted upwards.

I’ll check the article later.

[HLS]

Sorry,,
I hadn’t read the article before answering your question.

Neg Am loans are also called ARM’s.. Pay Option Arms.(POA’s)

I’m not aware of any I/O loans that were sub 4% originated in 2005 and after….If there was anything like that prior to 2005, it would have likely already adjusted upwards.

I’ll check the article later.

[Eugene]

“What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson”

I’m not talking about subprime loans.

If you look at that article, on page 31 it says that 1/3 of all outstanding ARMs in San Diego County (prime and subprime) are “red rate group”, with initial interest rate below 4.0%. The question is, are all these loans neg-am, or was there anything else going on.

[Eugene]

“What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson”

I’m not talking about subprime loans.

If you look at that article, on page 31 it says that 1/3 of all outstanding ARMs in San Diego County (prime and subprime) are “red rate group”, with initial interest rate below 4.0%. The question is, are all these loans neg-am, or was there anything else going on.

[Eugene]

“What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson”

I’m not talking about subprime loans.

If you look at that article, on page 31 it says that 1/3 of all outstanding ARMs in San Diego County (prime and subprime) are “red rate group”, with initial interest rate below 4.0%. The question is, are all these loans neg-am, or was there anything else going on.

[Eugene]

“What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson”

I’m not talking about subprime loans.

If you look at that article, on page 31 it says that 1/3 of all outstanding ARMs in San Diego County (prime and subprime) are “red rate group”, with initial interest rate below 4.0%. The question is, are all these loans neg-am, or was there anything else going on.

[HLS]

What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson

There is isn’t an exact “typical” subprime loan, that was originated 1n 2005-2006.

If somebody had a 5% start rate fixed for 2 years with an interest only minimum payment, their first rate adjustment after two years (2/28 or 2/38) could be 2 points, making their rate 7%. In itself, that would be a 40% jump in interest payment.
However,
It would probably recast to a 28 year amortization, making the payment $2039 (63% higher)
OR
a 38 year amortization making the payment $1883 (50% higher)

This payment would only be in effect for 6 or 12 months max, before it would adjust higher again.

Nobody will have an increase that is 100% or higher, nor anything that would be much lower than 20-25%.

The sad thing is that these loans were never intended to be a long term loan, but a short term band-aid loan.
Unfortunately the scum of the mortgage industry didn’t explain it to borrower’s that way.

As of today, there are still more than 80% of subprime borrowers paying their loans. I expect this to change for the worse in many areas as rates adjust higher and folks simply cannot qualify for a refi.

[HLS]

What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson

There is isn’t an exact “typical” subprime loan, that was originated 1n 2005-2006.

If somebody had a 5% start rate fixed for 2 years with an interest only minimum payment, their first rate adjustment after two years (2/28 or 2/38) could be 2 points, making their rate 7%. In itself, that would be a 40% jump in interest payment.
However,
It would probably recast to a 28 year amortization, making the payment $2039 (63% higher)
OR
a 38 year amortization making the payment $1883 (50% higher)

This payment would only be in effect for 6 or 12 months max, before it would adjust higher again.

Nobody will have an increase that is 100% or higher, nor anything that would be much lower than 20-25%.

The sad thing is that these loans were never intended to be a long term loan, but a short term band-aid loan.
Unfortunately the scum of the mortgage industry didn’t explain it to borrower’s that way.

As of today, there are still more than 80% of subprime borrowers paying their loans. I expect this to change for the worse in many areas as rates adjust higher and folks simply cannot qualify for a refi.

[HLS]

What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson

There is isn’t an exact “typical” subprime loan, that was originated 1n 2005-2006.

If somebody had a 5% start rate fixed for 2 years with an interest only minimum payment, their first rate adjustment after two years (2/28 or 2/38) could be 2 points, making their rate 7%. In itself, that would be a 40% jump in interest payment.
However,
It would probably recast to a 28 year amortization, making the payment $2039 (63% higher)
OR
a 38 year amortization making the payment $1883 (50% higher)

This payment would only be in effect for 6 or 12 months max, before it would adjust higher again.

Nobody will have an increase that is 100% or higher, nor anything that would be much lower than 20-25%.

The sad thing is that these loans were never intended to be a long term loan, but a short term band-aid loan.
Unfortunately the scum of the mortgage industry didn’t explain it to borrower’s that way.

As of today, there are still more than 80% of subprime borrowers paying their loans. I expect this to change for the worse in many areas as rates adjust higher and folks simply cannot qualify for a refi.

[HLS]

What do you mean sub-2% ??
There were no 2% SP loans….
The 1%-2% PAY RATES were 7%++ loans that were neg am, and are not covered by Bush/Paulson

There is isn’t an exact “typical” subprime loan, that was originated 1n 2005-2006.

If somebody had a 5% start rate fixed for 2 years with an interest only minimum payment, their first rate adjustment after two years (2/28 or 2/38) could be 2 points, making their rate 7%. In itself, that would be a 40% jump in interest payment.
However,
It would probably recast to a 28 year amortization, making the payment $2039 (63% higher)
OR
a 38 year amortization making the payment $1883 (50% higher)

This payment would only be in effect for 6 or 12 months max, before it would adjust higher again.

Nobody will have an increase that is 100% or higher, nor anything that would be much lower than 20-25%.

The sad thing is that these loans were never intended to be a long term loan, but a short term band-aid loan.
Unfortunately the scum of the mortgage industry didn’t explain it to borrower’s that way.

As of today, there are still more than 80% of subprime borrowers paying their loans. I expect this to change for the worse in many areas as rates adjust higher and folks simply cannot qualify for a refi.

[Eugene]

A question to knowledgeable people.

What does a typical 2006 sub-2% “teaser rate” ARM look like? What’s the reset trajectory?

Is it true what that guy says, that those loans start to reset quickly (within 6-12 months)? If so, how long does a full reset take?

How many of those are negative-amortization loans that are not due to reset for 5 years?

[Eugene]

A question to knowledgeable people.

What does a typical 2006 sub-2% “teaser rate” ARM look like? What’s the reset trajectory?

Is it true what that guy says, that those loans start to reset quickly (within 6-12 months)? If so, how long does a full reset take?

How many of those are negative-amortization loans that are not due to reset for 5 years?

[Eugene]

A question to knowledgeable people.

What does a typical 2006 sub-2% “teaser rate” ARM look like? What’s the reset trajectory?

Is it true what that guy says, that those loans start to reset quickly (within 6-12 months)? If so, how long does a full reset take?

How many of those are negative-amortization loans that are not due to reset for 5 years?

[Eugene]

A question to knowledgeable people.

What does a typical 2006 sub-2% “teaser rate” ARM look like? What’s the reset trajectory?

Is it true what that guy says, that those loans start to reset quickly (within 6-12 months)? If so, how long does a full reset take?

How many of those are negative-amortization loans that are not due to reset for 5 years?

[Eugene]

“What if the property won’t appraise for the amount that they are trying to re-fi? ”

The article uses some sort of automatic appraisal algorithm to calculate equity. It’s not very accurate (how is it possible to buy in 2006 and have -15% or less equity by the end of 2006?) But for the kind of approximate calculations they are doing, it’s probably okay.

[Eugene]

“What if the property won’t appraise for the amount that they are trying to re-fi? ”

The article uses some sort of automatic appraisal algorithm to calculate equity. It’s not very accurate (how is it possible to buy in 2006 and have -15% or less equity by the end of 2006?) But for the kind of approximate calculations they are doing, it’s probably okay.

[Eugene]

“What if the property won’t appraise for the amount that they are trying to re-fi? ”

The article uses some sort of automatic appraisal algorithm to calculate equity. It’s not very accurate (how is it possible to buy in 2006 and have -15% or less equity by the end of 2006?) But for the kind of approximate calculations they are doing, it’s probably okay.

[Eugene]

“What if the property won’t appraise for the amount that they are trying to re-fi? ”

The article uses some sort of automatic appraisal algorithm to calculate equity. It’s not very accurate (how is it possible to buy in 2006 and have -15% or less equity by the end of 2006?) But for the kind of approximate calculations they are doing, it’s probably okay.

[Eugene]

“What if the property won’t appraise for the amount that they are trying to re-fi? ”

The article uses some sort of automatic appraisal algorithm to calculate equity. It’s not very accurate (how is it possible to buy in 2006 and have -15% or less equity by the end of 2006?) But for the kind of approximate calculations they are doing, it’s probably okay.

[Ex-SD]

My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”

Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable

I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”

[Ex-SD]

My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”

Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable

I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”

[Ex-SD]

My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”

Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable

I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”

[Ex-SD]

My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”

Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable

I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”

[Author]

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