OCRegister with a great article on the BoFA report regarding the ARM resets

[lonestar2000]

Mortgage correction just ‘tip of the iceberg’

http://blogs.ocregister.com/mortgage/archives/2007/06/bofa_analyst_mortgage_correcti_1.html

Scruffydog, if you’re still in denial, read the comments at the bottom of the article.

[Duck]

So about 80% of these resets are subprime? Looks like the lower end will continue to get hammered. Of course the reset schedule doesn’t really tell you too much. Were these mostly for new purchases or were these re-fi’s on a home someone owned for 20 years in Detroit where they needed to take the equity out of their house to pay off some bills after getting laid off?

Personally I put very little faith in the accuracy of any charts from lending institutions. I sold a home I had an ARM on nearly a year ago and I still get mailers from lenders asking me to re-fi it even though it had been paid off and the reconveyance recorded. The loan was never close to resetting, but I kept getting these “notices” about how my payment was going to skyrocket. I finally called one lender and asked him where he was getting his info. from because it was wrong. He had no answer and said he was just a telemarketer doing his job. That’s the current state of mortgage brokering. Pay some kid $8/hour to try to hook some fish.

[Duck]

So about 80% of these resets are subprime? Looks like the lower end will continue to get hammered. Of course the reset schedule doesn’t really tell you too much. Were these mostly for new purchases or were these re-fi’s on a home someone owned for 20 years in Detroit where they needed to take the equity out of their house to pay off some bills after getting laid off?

Personally I put very little faith in the accuracy of any charts from lending institutions. I sold a home I had an ARM on nearly a year ago and I still get mailers from lenders asking me to re-fi it even though it had been paid off and the reconveyance recorded. The loan was never close to resetting, but I kept getting these “notices” about how my payment was going to skyrocket. I finally called one lender and asked him where he was getting his info. from because it was wrong. He had no answer and said he was just a telemarketer doing his job. That’s the current state of mortgage brokering. Pay some kid $8/hour to try to hook some fish.

[LA_Renter]

From Barons via Big Picture

“After modest reflection, any disinterested observer can’t help but find that accompanying table quite alARMing. It’s from a recent MacroMavens report, the handiwork of the incomparable Stephanie Pomboy, whose rants and raves we’ve had the pleasure of occasionally sharing with you. What its blood-curdling numbers depict is that the woes of mortgage lenders are not, as so widely believed, confined to the beleaguered subprime contingent, but are casting a much larger and chillier shadow.

More specifically, the table shows all too clearly that an astounding percentage of adjustable-rate mortgages already are underwater, and it estimates how much equity would be wiped out if home values decline by 5%, 10% and 15% and translates the corresponding losses into dollars.

As Stephanie comments: “Based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning $693 billion in mortgage loans are already in the red. Assuming lenders are able to recover 70% of those assets — which seems optimistic given the massive amount of housing inventory yet to be unwound — that means mortgage lenders are already grappling with $210 billion in outright losses.”

And that, she points out, is merely the direct hit. Thanks to what she nicely dubs the “divine miracle of leverage,” the total financial exposure to these claims is many multiples of that. To which we say, ugh!

What’s more, Stephanie notes, these horrendous losses are coming at a time when the financial sector is “uniquely unprepared to withstand them.” Commercial banks, she points out, have let their loan-loss provisions sink to 20-year lows while increasing their exposure to real estate to record highs. Mortgages, she reckons, account for a tidy 55% of total bank loans — and that doesn’t include the trillion dollars worth of mortgage-backed securities on bank balance sheets.

So much for the myth that banks have cleverly “offloaded” their real estate risk.

Chart is on this link

http://bigpicture.typepad.com/comments/2007/07/underwater-arms.html

[LA_Renter]

From Barons via Big Picture

“After modest reflection, any disinterested observer can’t help but find that accompanying table quite alARMing. It’s from a recent MacroMavens report, the handiwork of the incomparable Stephanie Pomboy, whose rants and raves we’ve had the pleasure of occasionally sharing with you. What its blood-curdling numbers depict is that the woes of mortgage lenders are not, as so widely believed, confined to the beleaguered subprime contingent, but are casting a much larger and chillier shadow.

More specifically, the table shows all too clearly that an astounding percentage of adjustable-rate mortgages already are underwater, and it estimates how much equity would be wiped out if home values decline by 5%, 10% and 15% and translates the corresponding losses into dollars.

As Stephanie comments: “Based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning $693 billion in mortgage loans are already in the red. Assuming lenders are able to recover 70% of those assets — which seems optimistic given the massive amount of housing inventory yet to be unwound — that means mortgage lenders are already grappling with $210 billion in outright losses.”

And that, she points out, is merely the direct hit. Thanks to what she nicely dubs the “divine miracle of leverage,” the total financial exposure to these claims is many multiples of that. To which we say, ugh!

What’s more, Stephanie notes, these horrendous losses are coming at a time when the financial sector is “uniquely unprepared to withstand them.” Commercial banks, she points out, have let their loan-loss provisions sink to 20-year lows while increasing their exposure to real estate to record highs. Mortgages, she reckons, account for a tidy 55% of total bank loans — and that doesn’t include the trillion dollars worth of mortgage-backed securities on bank balance sheets.

So much for the myth that banks have cleverly “offloaded” their real estate risk.

Chart is on this link

http://bigpicture.typepad.com/comments/2007/07/underwater-arms.html

[patientrenter]

Don’t overestimate the leverage effect. If $150 billion of loan values are not paid, either through forgiveness or loan modification, then that’s exactly $150 billion of losses, not $1,500 billion. Some hedge funds or investors in derivatives or other instruments may be heavily exposed to that $150 billion of losses. But it’s still… $150 billion.

Of course, these loans found their way into many other assets, so there could be assets worth (let’s go nuts here) many trillions that are affected in some way by the loans with losses. But the only way that the $150 billion can become much bigger is a crash in liquidity that forces sales of related assets at fire-sale prices that go beyond the actual losses on the underlying loans. What’s the chance that the financial community will sit on the sidelines twiddling their thumbs and let that happen? I know we like to complain about them, but I don’t think I’d call them stupid or self-destructive.

I fully expect this episode to trigger a generally higher price for risk in the markets, but adding 20-50bp to average corporate spreads, for example, is not earth-shaking, and is long overdue. And people would look closer at their hedge funds, that’s all.

Patient renter in OC

[patientrenter]

Don’t overestimate the leverage effect. If $150 billion of loan values are not paid, either through forgiveness or loan modification, then that’s exactly $150 billion of losses, not $1,500 billion. Some hedge funds or investors in derivatives or other instruments may be heavily exposed to that $150 billion of losses. But it’s still… $150 billion.

Of course, these loans found their way into many other assets, so there could be assets worth (let’s go nuts here) many trillions that are affected in some way by the loans with losses. But the only way that the $150 billion can become much bigger is a crash in liquidity that forces sales of related assets at fire-sale prices that go beyond the actual losses on the underlying loans. What’s the chance that the financial community will sit on the sidelines twiddling their thumbs and let that happen? I know we like to complain about them, but I don’t think I’d call them stupid or self-destructive.

I fully expect this episode to trigger a generally higher price for risk in the markets, but adding 20-50bp to average corporate spreads, for example, is not earth-shaking, and is long overdue. And people would look closer at their hedge funds, that’s all.

Patient renter in OC

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