questioning the option arm timebomb thesis

[Diego Mamani]

[quote=sdrealtor]It also mentions that once they do adjust the payment shock would be minimal so the only real danger is for those who suffer loss of employment. I am stunned if this is accurate as I beleived this was one of the real shoes that could drop. Government manipulation at its finest.[/quote]

I think the 2nd responder missed a crucial point here. The original article mentions one real danger other than loss of employment: overstated income at the time the original loan was written. Some originators had as much as 80% of loans in the “liar loan” category.

So… if a borrower was barely making her (inflated) monthly payments, even a small payment “shock” could end up being rather shocking indeed.

[Where are the new words “alot” and “beleived” coming from?]

[sdrealtor]

I did not miss that point, I made an assumption that a very large percetnage of those liars have already walked once they were severely underwater.

I expected and still expect damage from these loans. I now know that I underestimated how low interests rates could go and be held down for an extended period of time (which I be;leive is far from over now). I expected even more damage from the 5/1 ARM’s (rather than OA’s) which were the loans of choice in the nicer areas during the peak bubble times between 2004 and 2006. My best friend has a 5 year ARM interest only who I have been begging to refi into a 30 year fixed rate. He can afford to gamble (only a 300K loan and he makes well into 6 figures) so he never did. His loan is resetting next month and he just told his payment is going down more than $500/month.

[sdrealtor]

I did not miss that point, I made an assumption that a very large percetnage of those liars have already walked once they were severely underwater.

I expected and still expect damage from these loans. I now know that I underestimated how low interests rates could go and be held down for an extended period of time (which I be;leive is far from over now). I expected even more damage from the 5/1 ARM’s (rather than OA’s) which were the loans of choice in the nicer areas during the peak bubble times between 2004 and 2006. My best friend has a 5 year ARM interest only who I have been begging to refi into a 30 year fixed rate. He can afford to gamble (only a 300K loan and he makes well into 6 figures) so he never did. His loan is resetting next month and he just told his payment is going down more than $500/month.

[sdrealtor]

I did not miss that point, I made an assumption that a very large percetnage of those liars have already walked once they were severely underwater.

I expected and still expect damage from these loans. I now know that I underestimated how low interests rates could go and be held down for an extended period of time (which I be;leive is far from over now). I expected even more damage from the 5/1 ARM’s (rather than OA’s) which were the loans of choice in the nicer areas during the peak bubble times between 2004 and 2006. My best friend has a 5 year ARM interest only who I have been begging to refi into a 30 year fixed rate. He can afford to gamble (only a 300K loan and he makes well into 6 figures) so he never did. His loan is resetting next month and he just told his payment is going down more than $500/month.

[sdrealtor]

I did not miss that point, I made an assumption that a very large percetnage of those liars have already walked once they were severely underwater.

I expected and still expect damage from these loans. I now know that I underestimated how low interests rates could go and be held down for an extended period of time (which I be;leive is far from over now). I expected even more damage from the 5/1 ARM’s (rather than OA’s) which were the loans of choice in the nicer areas during the peak bubble times between 2004 and 2006. My best friend has a 5 year ARM interest only who I have been begging to refi into a 30 year fixed rate. He can afford to gamble (only a 300K loan and he makes well into 6 figures) so he never did. His loan is resetting next month and he just told his payment is going down more than $500/month.

[sdrealtor]

I did not miss that point, I made an assumption that a very large percetnage of those liars have already walked once they were severely underwater.

I expected and still expect damage from these loans. I now know that I underestimated how low interests rates could go and be held down for an extended period of time (which I be;leive is far from over now). I expected even more damage from the 5/1 ARM’s (rather than OA’s) which were the loans of choice in the nicer areas during the peak bubble times between 2004 and 2006. My best friend has a 5 year ARM interest only who I have been begging to refi into a 30 year fixed rate. He can afford to gamble (only a 300K loan and he makes well into 6 figures) so he never did. His loan is resetting next month and he just told his payment is going down more than $500/month.

[Diego Mamani]

Down by $500/month! That’s great.

My landlord bought at the peak, and his 5/1 ARM (also not an OA) resets next spring. I forgot what his index is, but I imagine that his monthly payments will probably remain unchanged, or might even come down, as in your friend’s case. But my landlord would still be bleeding cash every month, even after a $500 haircut.

[Diego Mamani]

Down by $500/month! That’s great.

My landlord bought at the peak, and his 5/1 ARM (also not an OA) resets next spring. I forgot what his index is, but I imagine that his monthly payments will probably remain unchanged, or might even come down, as in your friend’s case. But my landlord would still be bleeding cash every month, even after a $500 haircut.

[Diego Mamani]

Down by $500/month! That’s great.

My landlord bought at the peak, and his 5/1 ARM (also not an OA) resets next spring. I forgot what his index is, but I imagine that his monthly payments will probably remain unchanged, or might even come down, as in your friend’s case. But my landlord would still be bleeding cash every month, even after a $500 haircut.

[Diego Mamani]

Down by $500/month! That’s great.

My landlord bought at the peak, and his 5/1 ARM (also not an OA) resets next spring. I forgot what his index is, but I imagine that his monthly payments will probably remain unchanged, or might even come down, as in your friend’s case. But my landlord would still be bleeding cash every month, even after a $500 haircut.

[Diego Mamani]

Down by $500/month! That’s great.

My landlord bought at the peak, and his 5/1 ARM (also not an OA) resets next spring. I forgot what his index is, but I imagine that his monthly payments will probably remain unchanged, or might even come down, as in your friend’s case. But my landlord would still be bleeding cash every month, even after a $500 haircut.

[ltokuda]

The math seems to add up. It says that the average teaser rate was about 1.5%. The typical accrual rate on the loan is MTA + margin. MTA is about 0.5%. Margin is about 300 basis points = 3%. So the actual accrual rate is about 3.5%. In this scenario, paying the minimum 1.5% each month would put you into a positive amortization situation.

I’m not sure how they calculated a payment shock of just 20-25%. If you were paying 1.5% on a 30 year loan, then after 5 years your loan got recast and you had to pay 3.5% on a 25 year loan, then your monthly payment would go up by 45%.

Also, the article says that 80% of option arms were low or no-doc loans. But it concludes that since over 17% of option arm’s are already in foreclosure, the “bad apples” are mostly gone and what’s left are borrowers who didn’t lie about their incomes. And since option arms generally require a max DTI of 28%, these borrowers should be able to absorb the payment shock.

I don’t know how he came to the conclusion that a 17% foreclosure rate before the big recast wave is a sign that things will be better when the wave hits. That’s a bit bizzare.

[ltokuda]

The math seems to add up. It says that the average teaser rate was about 1.5%. The typical accrual rate on the loan is MTA + margin. MTA is about 0.5%. Margin is about 300 basis points = 3%. So the actual accrual rate is about 3.5%. In this scenario, paying the minimum 1.5% each month would put you into a positive amortization situation.

I’m not sure how they calculated a payment shock of just 20-25%. If you were paying 1.5% on a 30 year loan, then after 5 years your loan got recast and you had to pay 3.5% on a 25 year loan, then your monthly payment would go up by 45%.

Also, the article says that 80% of option arms were low or no-doc loans. But it concludes that since over 17% of option arm’s are already in foreclosure, the “bad apples” are mostly gone and what’s left are borrowers who didn’t lie about their incomes. And since option arms generally require a max DTI of 28%, these borrowers should be able to absorb the payment shock.

I don’t know how he came to the conclusion that a 17% foreclosure rate before the big recast wave is a sign that things will be better when the wave hits. That’s a bit bizzare.

[ltokuda]

The math seems to add up. It says that the average teaser rate was about 1.5%. The typical accrual rate on the loan is MTA + margin. MTA is about 0.5%. Margin is about 300 basis points = 3%. So the actual accrual rate is about 3.5%. In this scenario, paying the minimum 1.5% each month would put you into a positive amortization situation.

I’m not sure how they calculated a payment shock of just 20-25%. If you were paying 1.5% on a 30 year loan, then after 5 years your loan got recast and you had to pay 3.5% on a 25 year loan, then your monthly payment would go up by 45%.

Also, the article says that 80% of option arms were low or no-doc loans. But it concludes that since over 17% of option arm’s are already in foreclosure, the “bad apples” are mostly gone and what’s left are borrowers who didn’t lie about their incomes. And since option arms generally require a max DTI of 28%, these borrowers should be able to absorb the payment shock.

I don’t know how he came to the conclusion that a 17% foreclosure rate before the big recast wave is a sign that things will be better when the wave hits. That’s a bit bizzare.

[ltokuda]

The math seems to add up. It says that the average teaser rate was about 1.5%. The typical accrual rate on the loan is MTA + margin. MTA is about 0.5%. Margin is about 300 basis points = 3%. So the actual accrual rate is about 3.5%. In this scenario, paying the minimum 1.5% each month would put you into a positive amortization situation.

I’m not sure how they calculated a payment shock of just 20-25%. If you were paying 1.5% on a 30 year loan, then after 5 years your loan got recast and you had to pay 3.5% on a 25 year loan, then your monthly payment would go up by 45%.

Also, the article says that 80% of option arms were low or no-doc loans. But it concludes that since over 17% of option arm’s are already in foreclosure, the “bad apples” are mostly gone and what’s left are borrowers who didn’t lie about their incomes. And since option arms generally require a max DTI of 28%, these borrowers should be able to absorb the payment shock.

I don’t know how he came to the conclusion that a 17% foreclosure rate before the big recast wave is a sign that things will be better when the wave hits. That’s a bit bizzare.

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