questioning the option arm timebomb thesis

[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.

[ctr70]

People with prime and alt-a 5/1’s and 3/1’s with fairly low margin’s have been resetting to LOWER rates than their original rates the last 2+ years.

The option ARM servicers are also being very aggressive with modifications and doing principle reductions. Wachovia (from their World Savings loans) is the most aggressive from what I’ve heard reducing principle on the options ARM’s.

[ctr70]

People with prime and alt-a 5/1’s and 3/1’s with fairly low margin’s have been resetting to LOWER rates than their original rates the last 2+ years.

The option ARM servicers are also being very aggressive with modifications and doing principle reductions. Wachovia (from their World Savings loans) is the most aggressive from what I’ve heard reducing principle on the options ARM’s.

[ctr70]

People with prime and alt-a 5/1’s and 3/1’s with fairly low margin’s have been resetting to LOWER rates than their original rates the last 2+ years.

The option ARM servicers are also being very aggressive with modifications and doing principle reductions. Wachovia (from their World Savings loans) is the most aggressive from what I’ve heard reducing principle on the options ARM’s.

[ctr70]

People with prime and alt-a 5/1’s and 3/1’s with fairly low margin’s have been resetting to LOWER rates than their original rates the last 2+ years.

The option ARM servicers are also being very aggressive with modifications and doing principle reductions. Wachovia (from their World Savings loans) is the most aggressive from what I’ve heard reducing principle on the options ARM’s.

[ctr70]

People with prime and alt-a 5/1’s and 3/1’s with fairly low margin’s have been resetting to LOWER rates than their original rates the last 2+ years.

The option ARM servicers are also being very aggressive with modifications and doing principle reductions. Wachovia (from their World Savings loans) is the most aggressive from what I’ve heard reducing principle on the options ARM’s.

[ltokuda]

[quote=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.
[/quote]

That’s what doesn’t make sense to me. 80% of option arms were low/no doc. 17% of option arms have already resulted in foreclosure. Even if all of that 17% was low/no doc, that still leaves 63% low/no doc loans still active. It seems to be a bit of a leap to assume that “liars” are mostly gone and the honest low/no doc borrowers are what’s left. Maybe its true, but I just haven’t seen any evidence to support it.

The interesting thing about option arms is that with a low teaser rate, it can actually be cheaper to “own” than to rent. However, if a recast happens and the monthly mortgage goes up by 40%, that equation can change pretty drastically. I’m wondering how many people are riding it out until the math no longer makes sense.

[ltokuda]

[quote=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.
[/quote]

That’s what doesn’t make sense to me. 80% of option arms were low/no doc. 17% of option arms have already resulted in foreclosure. Even if all of that 17% was low/no doc, that still leaves 63% low/no doc loans still active. It seems to be a bit of a leap to assume that “liars” are mostly gone and the honest low/no doc borrowers are what’s left. Maybe its true, but I just haven’t seen any evidence to support it.

The interesting thing about option arms is that with a low teaser rate, it can actually be cheaper to “own” than to rent. However, if a recast happens and the monthly mortgage goes up by 40%, that equation can change pretty drastically. I’m wondering how many people are riding it out until the math no longer makes sense.

[ltokuda]

[quote=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.
[/quote]

That’s what doesn’t make sense to me. 80% of option arms were low/no doc. 17% of option arms have already resulted in foreclosure. Even if all of that 17% was low/no doc, that still leaves 63% low/no doc loans still active. It seems to be a bit of a leap to assume that “liars” are mostly gone and the honest low/no doc borrowers are what’s left. Maybe its true, but I just haven’t seen any evidence to support it.

The interesting thing about option arms is that with a low teaser rate, it can actually be cheaper to “own” than to rent. However, if a recast happens and the monthly mortgage goes up by 40%, that equation can change pretty drastically. I’m wondering how many people are riding it out until the math no longer makes sense.

[ltokuda]

[quote=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.
[/quote]

That’s what doesn’t make sense to me. 80% of option arms were low/no doc. 17% of option arms have already resulted in foreclosure. Even if all of that 17% was low/no doc, that still leaves 63% low/no doc loans still active. It seems to be a bit of a leap to assume that “liars” are mostly gone and the honest low/no doc borrowers are what’s left. Maybe its true, but I just haven’t seen any evidence to support it.

The interesting thing about option arms is that with a low teaser rate, it can actually be cheaper to “own” than to rent. However, if a recast happens and the monthly mortgage goes up by 40%, that equation can change pretty drastically. I’m wondering how many people are riding it out until the math no longer makes sense.

[ltokuda]

[quote=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.
[/quote]

That’s what doesn’t make sense to me. 80% of option arms were low/no doc. 17% of option arms have already resulted in foreclosure. Even if all of that 17% was low/no doc, that still leaves 63% low/no doc loans still active. It seems to be a bit of a leap to assume that “liars” are mostly gone and the honest low/no doc borrowers are what’s left. Maybe its true, but I just haven’t seen any evidence to support it.

The interesting thing about option arms is that with a low teaser rate, it can actually be cheaper to “own” than to rent. However, if a recast happens and the monthly mortgage goes up by 40%, that equation can change pretty drastically. I’m wondering how many people are riding it out until the math no longer makes sense.

[Eugene]

[quote]17% of option arms have already resulted in foreclosure[/quote]

There’s a big difference between “more than 17% in foreclosure” and “17% of option arms have already resulted in foreclosure”.

There are three stages of the process.

(1) When payments on the loan are 90 days late, the loan is called “seriously delinquent”.

(2) Three+ months later, the homeowner is served with a NOTS and the loan is called “in foreclosure”.

(3) NOTS results in a sale at auction steps, house becomes a REO, it’s sold by the bank to a third party. The moment the bank receives money from the sale, the loan disappears from the books.

What the article means to say is that, at this moment, 17% of all REMAINING loans in that portfolio are in stage 2. We have no way of knowing (from the article) how many loans are still there and how many are already gone. In all likelihood, numbers are ugly. About 40% of 2006 vintage option ARMs were already seriously delinquent or in foreclosure as of a year ago (December 2008). My guess would be that 50%, tops, of all 2006 vintage option ARMs are still on the books today, 40% of those delinquent or in foreclosure.

http://files.ots.treas.gov/1310191.pdf

Look at the lower-left chart on page 14.

[Eugene]

[quote]17% of option arms have already resulted in foreclosure[/quote]

There’s a big difference between “more than 17% in foreclosure” and “17% of option arms have already resulted in foreclosure”.

There are three stages of the process.

(1) When payments on the loan are 90 days late, the loan is called “seriously delinquent”.

(2) Three+ months later, the homeowner is served with a NOTS and the loan is called “in foreclosure”.

(3) NOTS results in a sale at auction steps, house becomes a REO, it’s sold by the bank to a third party. The moment the bank receives money from the sale, the loan disappears from the books.

What the article means to say is that, at this moment, 17% of all REMAINING loans in that portfolio are in stage 2. We have no way of knowing (from the article) how many loans are still there and how many are already gone. In all likelihood, numbers are ugly. About 40% of 2006 vintage option ARMs were already seriously delinquent or in foreclosure as of a year ago (December 2008). My guess would be that 50%, tops, of all 2006 vintage option ARMs are still on the books today, 40% of those delinquent or in foreclosure.

http://files.ots.treas.gov/1310191.pdf

Look at the lower-left chart on page 14.

[Eugene]

[quote]17% of option arms have already resulted in foreclosure[/quote]

There’s a big difference between “more than 17% in foreclosure” and “17% of option arms have already resulted in foreclosure”.

There are three stages of the process.

(1) When payments on the loan are 90 days late, the loan is called “seriously delinquent”.

(2) Three+ months later, the homeowner is served with a NOTS and the loan is called “in foreclosure”.

(3) NOTS results in a sale at auction steps, house becomes a REO, it’s sold by the bank to a third party. The moment the bank receives money from the sale, the loan disappears from the books.

What the article means to say is that, at this moment, 17% of all REMAINING loans in that portfolio are in stage 2. We have no way of knowing (from the article) how many loans are still there and how many are already gone. In all likelihood, numbers are ugly. About 40% of 2006 vintage option ARMs were already seriously delinquent or in foreclosure as of a year ago (December 2008). My guess would be that 50%, tops, of all 2006 vintage option ARMs are still on the books today, 40% of those delinquent or in foreclosure.

http://files.ots.treas.gov/1310191.pdf

Look at the lower-left chart on page 14.

[Eugene]

[quote]17% of option arms have already resulted in foreclosure[/quote]

There’s a big difference between “more than 17% in foreclosure” and “17% of option arms have already resulted in foreclosure”.

There are three stages of the process.

(1) When payments on the loan are 90 days late, the loan is called “seriously delinquent”.

(2) Three+ months later, the homeowner is served with a NOTS and the loan is called “in foreclosure”.

(3) NOTS results in a sale at auction steps, house becomes a REO, it’s sold by the bank to a third party. The moment the bank receives money from the sale, the loan disappears from the books.

What the article means to say is that, at this moment, 17% of all REMAINING loans in that portfolio are in stage 2. We have no way of knowing (from the article) how many loans are still there and how many are already gone. In all likelihood, numbers are ugly. About 40% of 2006 vintage option ARMs were already seriously delinquent or in foreclosure as of a year ago (December 2008). My guess would be that 50%, tops, of all 2006 vintage option ARMs are still on the books today, 40% of those delinquent or in foreclosure.

http://files.ots.treas.gov/1310191.pdf

Look at the lower-left chart on page 14.

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