| The Next Mortgage Wave |
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| Saturday, 16 May 2009 20:09 | |
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The mortgage market will likely get worse. Of course the first wave was subprime. Commercial real estate is a major concern moving forward. Residential real estate is being hit by waves of defaults in different types of mortgages. The next wave is Alt-A and jumbo prime; this wave seems to be hitting now, but if you look to the not-so-distant horizon you will see the Option ARMs.
Option ARMs offered three payment options. The regular payment covered interest and reduced principal. The interest-only payment was not enough to reduce principal. Or you can do what 80% of option-ARM borrowers did: The third option offered the minimum payment which didn't even cover interest. That option adds the unpaid interest to the principal, causing the principal to rise (so-called "negative amortization" or “neg am”); the neg am was the preference for 80% of Option ARM borrowers between 2004 and 2007.The total amount of subprime loans back in April 2008 was about $1.3 trillion; of course that segment of the market has already been decimated. Subprime loan “resets” peaked in early 2008.Commercial real estate mortgages right now are about $3.5 trillion. The commercial market is big and diverse, and it is getting hammered from all directions. Want to get a hotel room in Scottsdale or San Diego or Fort Meyers? No problem; plenty of available rooms at a discount. Need some office space? Deals can be found. Been to the mall or the strip center lately? Did you notice the empty stores? And by this time next near there will be one-third fewer Chrysler and GM auto dealerships and that will ripple into vendors that supplied those dealers.  Outstanding Alt-A loans, another problem area, total more than $2 trillion; these were the so-called liar loans; available with low or no documentation. Many of the people who took out Alt-A loans were self employed or commissioned. The Alt-A wave should finally peak in mid-2011. About $749 billion of option ARMs were written from 2004 to 2007. Relatively little refinancing has taken place, and over $600 billion Option ARMs are still outstanding. The failure rate is staggering. The delinquency rate is already above 30%. The 2006 vintage has a default rate higher than 40%. Most Option ARMs reset after 3, 5, or 7 years; some stretched out for 10 years. World Savings (which was owned by Golden West, which was acquired by Wachovia, which was acquired by Wells Fargo) wrote so-called “pick-a-pay” loans. More than 70 percent of the pick-a-pay loans are in California, Arizona or Florida, three states where prices rose the fastest during the boom and have since fallen the most. Wells says it thinks 61 percent of the loans in those three states will not be paid as required by the mortgage, in contrast to 36 percent of the loans in other states. We will see one wave of Option Arm resets later this year. Many homeowners will be unable or unwilling to refinance a home absent substantial principal reduction. It would take a big concession to lower their monthly payments, and an even larger one to get the principal value of the loan down to the current value of the house, and we still aren’t seeing substantial principal reductions from the banks. The already staggeringly high default rates will likely stagger higher. This wave won’t peak until mid-2011. And just because a mortgage market wave hits a peak that does not necessarily mean a bottom in the housing market. Remember that banks currently have somewhere between 600,000 to 800,000 REO properties in “shadow inventory”, homes held by the bank but not listed for sale, just sitting vacant, waiting for the windows to be broken.
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| Last Updated on Thursday, 30 July 2009 00:22 |
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