The post entitled “A loan that’ll get ugly fast” inspired me to look at First Federated’s latest 10-Q to see if they had any statistics on their ARM loans. The latest 10-Q was posted on 11-08-2006 and did have some ARM data. This excerpt might be the most relevant:
“At September 30, 2006, 96.93% of our loan portfolio was invested in adjustable rate products. Loans with interest rates that adjust monthly based on the 3-Month Certificate of Deposit Index (“CODI”) comprised 50.56% of the loan portfolio. Loans with interest rates that adjust monthly based on the 12-month average U.S. Treasury Security rate (“12MAT”) comprised 18.77% of the loan portfolio. Loans with interest rates that adjust monthly based on the Federal Home Loan Bank (“FHLB”) Eleventh District Cost of Funds Index (“COFI”) comprised 25.82% of the loan portfolio. Loans with interest rates that adjust monthly based on the London Inter-Bank Offering Rate (“LIBOR”) and other indices comprised 1.78% of the loan portfolio.
Our adjustable rate loan products all allow for negative amortization when a scheduled monthly payment is not sufficient to pay the monthly interest accruing on the loan. Negative amortization, which results when interest earned by the Bank is added to borrowers’ loan balances, totaled $177.8 million at September 30, 2006, $62.6 million at December 31, 2005 and $37.6 million at September 30, 2005. Negative amortization increased by $41.4 million and $115.2 million during the third quarter and first nine months of 2006. This compares to increases of
$17.2 million and $32.1 million during the third quarter and first nine months of 2005. Negative amortization has increased over the last few quarters primarily due to rising short term interest rates and borrowers choosing to make less than a fully amortizing payment. The portfolio of single family loans with a one-year fixed payment period totaled $4.9 billion at September 30, 2006, $4.6 billion at December 31, 2005 and $4.2 billion at September 30, 2005. The portfolio of single family loans with three-to-five year fixed payment periods totaled $2.1 billion at September 30, 2006 and $2.7 billion at both December 31, 2005 and September 30, 2005. Negative amortization was 2.59% of all single family loans in the Bank’s portfolio as of September 30, 2006. This compares to 0.86% at December 31, 2005 and 0.55% at September 30, 2005.“
Note that according to this Business Week article that when a borrower pays less than the full interest due, that FED still gets to book the full amount of the payment, thus leading to a boost in earnings. The articles also states that the banks are well-insulated from foreclosures. However, I don’t see how this can be. With the negative amortization loans becoming a much larger portion of Federated’s loan portfolio, what happens when the negative-amortization borrowers default? Won’t Federated take a big hit in earnings?
Nice thread. Check out the “Shorting WaMu” thread, which has similar concerns about neg-am loans.
The big banks, like Citibank, and the Federal Reserve member banks (who are *they*?) were too smart for this gig. They offloaded their mortgages to the MBS market, so Federated and WaMu can go under/get bailed out, but the truly rich in this country won’t lose a penny. They just profit off the ignorant and poor.
Since you are a whiz at reading 10-Qs, what do you think about the exposure of the banks like Citibank, JP Morgan to mortgages? Won’t they just get richer when this housing market collapses, because they’ll buy up banks and real estate for pennies on the dollar in 2010-2015?
I actually don’t know that much about 10-Qs other than you can find them at http://www.sec.gov. As for Citibank and JPM, I would imagine that most of the big banks are diversified and won’t be hurt by the housing bubble pop as much as smaller banks like Federated who appear to have really jacked up their earnings using these risky mortgages. I also agree with you that the banks that sold their mortgages to the MBS market are going to be much better off than those (like Federated) who haven’t. It’s going to be interesting to watch how all this plays out over the next few years.
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