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Old 08-05-2009, 03:50 PM
 
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The L.A. Times said that we're headed for RE Bust #3. Not sure what happened to #2, but hey, if it's in the Times...
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Old 08-05-2009, 04:13 PM
 
Location: San Jose, CA
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LA Times must be couting the LA housing bust of 1990, prices dropped almost 30% then according to the articles I read, prices passed their 1990 peak in 2000.

The current housing bust is the same one that started in late '06, the reason foreclosure numbers aren't going down eventhough the bulk of subprime loans already reset is that banks and the government have been doing a lot to delay these foreclosures, at the same time the Option ARMs are recasting, we will have foreclosures for a while.
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Old 08-05-2009, 07:11 PM
 
268 posts, read 741,278 times
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Quote:
Originally Posted by cardinal2007 View Post
LA Times must be couting the LA housing bust of 1990, prices dropped almost 30% then according to the articles I read, prices passed their 1990 peak in 2000.

The current housing bust is the same one that started in late '06, the reason foreclosure numbers aren't going down eventhough the bulk of subprime loans already reset is that banks and the government have been doing a lot to delay these foreclosures, at the same time the Option ARMs are recasting, we will have foreclosures for a while.
The owners of properties still live in some dream land because they haven't priced their real estate to the true value of the market. Capitulation hasn't occurred yet so prices will still be above the median household wage afford ability. The median price for a single detached home should equal two years household wages of the area it's located in. Anything higher is like a house of cards. Unsustainable.
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Old 08-05-2009, 07:42 PM
 
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Quote:
Originally Posted by cardinal2007 View Post
LA Times must be couting the LA housing bust of 1990, prices dropped almost 30% then according to the articles I read, prices passed their 1990 peak in 2000.

The current housing bust is the same one that started in late '06, the reason foreclosure numbers aren't going down eventhough the bulk of subprime loans already reset is that banks and the government have been doing a lot to delay these foreclosures, at the same time the Option ARMs are recasting, we will have foreclosures for a while.
I think they were referring to subprime... then option ARMs (which generally reset in 1-2 years)... and now ALT-As, which reset after 3-7 years. The easy money ALT-As are just now hitting and will continue resetting through 2012-2013. If you figure that real estate has historically trended in seven-year cycles and the current bust started in late 2005 or 2006, that should be just about right. But who knows?
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Old 08-05-2009, 08:38 PM
 
Location: San Jose, CA
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I did a lot of research on Option ARMs, Wachovia (Golden West), now Wells-Fargo loans have a 125% recast rule, and reset in 5 years. Depending on the interest rate and the specific terms the loans are just recasting, or might recast next year or so, or are just resetting. The recast rules on those loans are the most generous, most others were 110%- 115% recast.

The terms on Wachovia loans worked like this. Say in 2005 someone wants to buy a house for $500k, they have good credit, and 20% down payment from a second, or a sale of a previous house. Wachovia comes in and gives them $400k, sets the interest rate at 6% and sets the payments to be one of 4 choices, 1. Minimum payment, pay as if the loan where set at 1% interest 30yr ($1286.56/mo). 2. Pay as if interest only loan ($2000/mo), 3. Pay as if it were a 30yr fixed 6% loan, ($2398.20/mo). 4. Pay as if it were a 15yr fixed 6% loan ($3375.43).
Any interest not paid goes to the loan balance, so if you pay the minimum every month the balance grows at $714/mo, if the loan reaches 125% of the original level (which wont happen in this scenario due to the low interest rate), then the loan recasts and the homeowner has to pay off the balance over 30 years as a ARM fixed until it resets. After 5 years, (2010) the loan resets here if it didn't already recasts, it recasts, the homeowner has to pay the loan off as a ARM, if it resets to 5%, the balance has now gone up to about $445k, payments where minimum $1431.03/mo after the reset the new minimum is $2388.06/mo. If I were buying a house I could get a second mortgage for the $100k, for less than $700/mo, and have a $500k house for less than $2000/mo. But after the reset it goes up to over $3000/mo, and I can't afford that, so I call the bank. The bank can't help me, because I can't afford to even pay a reasonable amount on the balance, so I try a short sale. If the prices are the same, I list for $500k, and hope that the second is willing to eat the loss.

The bigger issue with them is that for 5 years the bank can't ask for more money, so until the reset or recast the bank has to continue watching the LTV deteriorate while the homeowner pays less than interest. The bank can offer to let them change to fixed fully amortized loans, but since the payments on those must be a lot higher the homeowners will likely reject them. At the end of 5 years the payments go up even if the interest rate goes down, so the owners might default if they used the loan to buy with a higher budget, as supposedly that's what Option ARMs where used for, but they have to wait the full 5 years. Why won't the homeowner walk away earlier? Well some might, but there is little incentive to do so, the payments are less than the rent on a comparable place, especially if the Option ARM was for 100% of the purchase price (1670/mo payment on a $500k house), that moving out would cost them money, so pay the minimum, then default, then pay $0/mo for a while and then be foreclosed. The entire time they would live in a nice house, pay less than interest (less than rent), then nothing for several months and then leave the bank with the property, they end up better off than trying to leave early. So the Option ARMs are 5 years out. Alt-A is just a label to mean lack of documentation, we will take your word for it, the resets on those can be fairly meaningless since both the prime rate, and the LIBOR rate are low, many regular ARMs are resetting down.

Pick-A-Payment/Pay Option ARMs are where the big issues are, I have been saying this since 2007, when the "subprime crisis" began. Pick-A-Pay Mortgages Turning Worse Than Subprime - WSJ.com (http://online.wsj.com/article/BT-CO-20090710-711324.html - broken link)
'Pay option' loans could swell defaults - Mortgage Mess- msnbc.com
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Old 08-06-2009, 07:36 AM
 
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You're exactly right! The majority of buyers in high priced markets (like CA) took Option ARMs from 2002 to 2006. I did that very thing-- on purpose. My interest rate dropped every month as the Fed lowered rates, negatively amortizing my loan balance while the market was appreciating parabolically. I did this for several years until the rates were primed to rise, then I locked in a 4.25 15-year fixed. I used this as a short-term strategy, as did others who could qualify for a fixed rate but chose to capitalize on a window of opportunity to save money while waiting for the lowest long-term rate possible.

Unfortunately, many people took Option ARMs because it was the only way to qualify for an unaffordable home. This strategy was doomed, because they can't qualify for a fixed rate to get out of these loans, and the hole they dug deepens as their property depreciates faster, while neg am inflates their balance. Plan A failed, so Plan B is to become squatters until the bank tires of the game and tosses them out. When this happens, foreclosures will skyrocket.

The smart money has abandoned Option ARMS. The people left are sitting on a powder keg. Since Option ARMS peaked in 2004-2006, we should just now be coming into the boom. The fallout may last longer than 2013, since banks were still making these loans in late 2007. There's a lot of fuel out there to keep this thing burning for a while.
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Old 08-06-2009, 03:07 PM
 
Location: Colorado Springs, CO
2,221 posts, read 4,813,383 times
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Quote:
Originally Posted by cardinal2007 View Post


The bigger issue with them is that for 5 years the bank can't ask for more money, so until the reset or recast the bank has to continue watching the LTV deteriorate while the homeowner pays less than interest. The bank can offer to let them change to fixed fully amortized loans, but since the payments on those must be a lot higher the homeowners will likely reject them. At the end of 5 years the payments go up even if the interest rate goes down, so the owners might default if they used the loan to buy with a higher budget, as supposedly that's what Option ARMs where used for, but they have to wait the full 5 years. Why won't the homeowner walk away earlier? Well some might, but there is little incentive to do so, the payments are less than the rent on a comparable place, especially if the Option ARM was for 100% of the purchase price (1670/mo payment on a $500k house), that moving out would cost them money, so pay the minimum, then default, then pay $0/mo for a while and then be foreclosed. The entire time they would live in a nice house, pay less than interest (less than rent), then nothing for several months and then leave the bank with the property, they end up better off than trying to leave early. So the Option ARMs are 5 years out. Alt-A is just a label to mean lack of documentation, we will take your word for it, the resets on those can be fairly meaningless since both the prime rate, and the LIBOR rate are low, many regular ARMs are resetting down.
A couple points. The Alt-A resets aren't just an interest rate adjustment from a prime/LIBOR base rate...many were written with "teaser" low interest rates for the first 1, 2, or even 5 years...so the first reset still results in a hefty payment increase, even if the base rate has declined. So many of the loans in the Alt-A space, especially in the bubble zone, are ticking bombs. More "affordability" smoke and mirrors run amok.

The average difference between an option ARM (aka "exploding ARM") minimum payment to the recast fixed payment is approximately double. One point you missed is that the fixed amortization at recast is not made for 30 more years, it is generally made over the remaining life of the loan. So if the recast occurs after 5 years, the fixed payment is for 115% of the original principal balance over 25 years, not 30. Last time I looked, over 75% of the option ARM loans made in 2005-2007 had never had a payment made larger than the minimum payment...it's safe to assume that the vast majority of these loans will default immediately when recast--especially considering that most of the homeowers (sic) are massively upside down given the combination of negative amortization and cliff-diving values.

The last good analysis I have says that the POA defaults are being spread out more than the initial data suggested. Why? Because many the loans are now defaulting before the recast even occurs. Welcome to Option ARMageddon...
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Old 08-09-2009, 01:23 AM
 
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Here is a better question. When these loans start to reset what will happen to investor confidence? My guess is it will spook the investors and cause, yet another panic and drop 50%. Remember, during the great depression the market didn't fall overnight.
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Old 09-18-2009, 06:17 AM
 
Location: Sitting on a bar stool. Guinness in hand.
4,429 posts, read 5,808,512 times
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Default "Option" mortgages to explode, officials warn

Option mortgages to explode, officials warn | Reuters

Quote:
Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."
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Old 09-18-2009, 09:49 AM
 
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How would you invest knowing the impending explosion of the option mortgages? Is there a hedge to protect yourself against the ticking bomb?
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