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Old 09-09-2009, 07:26 AM   #1 (permalink)
warrior bodhisattva
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U.S. foreclosure aftershock looms: It's not over yet....

The credit/mortgage mess continues to unwind itself....

Another Wave of Foreclosures Looms
Ballooning Payments Put Mortgages at Risk, Posing New Setback to Market

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, September 9, 2009

The housing market faces the prospect of a new round of foreclosures as hundreds of thousands of risky home loans known as option adjustable-rate mortgages reset to significantly higher payments that could force borrowers to fall behind, according to a report released Tuesday by Fitch Ratings.

About 70 percent of the $189 billion in outstanding option ARMs will reset by 2011, the report said, which would be another setback to a teetering housing market still struggling to recover from the mortgage meltdown that precipitated the financial crisis.

Option ARMs make up only 1.3 percent of percent of outstanding mortgages and were used by a far smaller segment of the population than subprime mortgages, according to First American CoreLogic, so the fallout from the resets should not be as devastating. But the unraveling of the option ARMs could be felt for years.

"It does tell you there's going to be continued front-page news about high levels of foreclosures as these loans continue to struggle," said Paul Miller, an analyst at FBR Capital Markets.

Option ARMs, also called pick-a-pay loans, allow borrowers to choose how much to pay each month. Nearly all the borrowers who took out this type of loan from 2004 to 2007 chose to pay less than the interest due. Sometimes they paid as little as 1 percent interest. But the loans eventually require the borrowers to start paying the principal and full interest rate, so the payments shoot up.

"It's a ticking time bomb for some people," said Brian Bethune, an economist at IHS Global Insight, who said banks have already written off about $500 billion of these loans and other risky mortgages. Consequently, foreclosures have substantially reduced the number of outstanding option arms.

In its report, Fitch estimates that $134 billion in option ARMs will reset in the next two years. It expects monthly payments to jump 63 percent on average, or $1,053 a month, for loans adjusting this year and next, prompting a rise in defaults and foreclosures.

One surprise is that many option ARMs have gone bad even before adjusting, suggesting that some of these borrowers didn't stand a chance, said Sam Khater, a senior economist at First American CoreLogic. As of April, more than 35 percent of option ARMs were at least two months late even though they had not reset.

"These people were having trouble making the minimum payment, let alone dealing with the payment shock once the loan adjusted," Khater said.

At the root of the problem is that many who took out option ARMs were betting that home prices would rise. The loans helped people buy homes at a time when prices surged to unprecedented highs. As long as home prices kept climbing, these borrowers could refinance before their loans adjusted. But once prices tumbled, that option vanished. Now many people cannot refinance because they owe more than their homes were worth.

The most severe problems have surfaced in states with the steepest price drops. About 75 percent of option ARMs financed homes in California, Florida, Nevada and Arizona, where prices have plunged on average 48 percent from the second quarter of 2006 to the first quarter of this year, according to Fitch.

But for people struggling to make the lower payment before the loan adjusts, refinancing probably won't help, said Guy Cecala, publisher of Inside Mortgage Finance. "Just about anything they refinance into is going to give them higher payments than they have now."

The Fitch Report covers only those mortgages that were securitized, meaning packaged into securities and resold. Fitch does not analyze that mortgage financiers Fannie Mae and Freddie Mac, or lenders, hold in their portfolios.

Recognizing the troubles ahead, some of the nation's largest lenders have tried to limit losses by modifying or working with borrowers refinance the option ARMs remaining in the portfolios, Cecala said.

Among the most aggressive have been Bank of America, J.P. Morgan Chase and Wells Fargo. Each of these has recently acquired another major lender specializing in option ARMs: Countrywide, Washington Mutual and Wachovia, respectively.

As for the loans that were securitized, only 3.5 percent of the 1 million loans made in 2004 through 2007 and covered in the Fitch report have been modified.
Another Wave of Foreclosures Looms - washingtonpost.com

The crux of this is ARMs coming to term: people who chose to make low payments on their mortgages, most of them choosing to pay less than the interest due.

Now, this includes only about 1% of mortgage holders, but, hey, that's 1 out of 100...and on top of an existing mess.

I sincerely hope the U.S. adequately rewrites the rules of credit and borrowing. I've said it before and I'll say it again, you only have to look as far as Canada to see how well banking regulation can work.

What are your thoughts on this?

It looks like an indicator that things will continue to look bad for at least another couple of years. When you've gone on recklessly too far and for too long, you can't expect things to get back to normal overnight.
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot
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Old 09-11-2009, 11:34 AM   #2 (permalink)
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Let me go the opposite direction. What if the Fed did NOT insure (read: bailout) Freddie and Fannie, which was the final destination for these high risk loans? What if the Fed did not protect these companies from making their high risk loans to people who can't afford the homes? What if the banks had to take the risks of these loans on their own and sink or swim with the results?

The answer:

These loans would not exist. We would immediately return to conservative lending practices: 20% down and you must be a qualified buyer. Housing prices would not have become artificially inflated by high demand due to an influx of money and (high risk) buyers into the market. Far less foreclosures. No housing bubble. In short, it was the involvement of the Fed, fueled by a political agenda in Congress, who allowed these loans to exist in the first place. If the Fed had not meddled, the banks would have never made these loans and the collapse would not have occurred because the "housing bubble" would not have existed.

So, there is a strong argument that the current "regulation" is what caused the problem. Why add more regulation? Why not just eliminate the parachute (foreseeable federal bailouts) from the equation and then the banks won't behave so irresponsibly?

The only downside is that more people will rent and less will own. However, if you take out a 100%, interest only loan, you are only renting anyway.
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Old 10-01-2009, 07:32 PM   #3 (permalink)
warrior bodhisattva
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Originally Posted by Cimarron29414 View Post
So, there is a strong argument that the current "regulation" is what caused the problem. Why add more regulation? Why not just eliminate the parachute (foreseeable federal bailouts) from the equation and then the banks won't behave so irresponsibly?
It goes both ways. If you have a culture of bailouts, then financial institutions will be more apt to take risks: the payoff if it works is huge, and failure will get government money to make it all better. On the other hand, if you have adequate regulation, the institutions are restricted by law from taking certain risks in the first place. The latter is what it's like in Canada. Before you can get a mortgage, you have to qualify by measuring up to a set maximum amount of risk.

Have you been watching Canada's banking performance throughout the crisis?

* * * * *

Oh, and this just in:

Foreclosure Rate Rises 17 Percent
By Renae Merle
Washington Post Staff Writer
Wednesday, September 30, 2009; 10:46 AM

The number of homes lost to foreclosures rose about 17 percent in the second quarter of this year despite the launch of an extensive government program aimed at helping borrowers save their home, according to government data released Wednesday.

Completed foreclosures reached 106,007 during the second quarter, compared with 90,696 during the first three months of the year, according to the report by the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which regulates banks. Their quarterly report examines 64 percent of outstanding mortgages in the country.

The increase was primarily the result of various government and industry foreclosure moratoriums, the report said.

Efforts to keep borrowers in their homes increased during that same period, including the implementation of the Making Home Affordable plan. Under that plan, lenders are paid to lower a borrower's monthly payments. Government data has shown that since the program was launched in March, nearly 400,000 borrowers have been helped. The Obama administration aims to complete 500,000 loan modifications by November.

But even as that program ramps up, rising unemployment continues to hamper foreclosure prevention efforts. The level of foreclosure actions started during the quarter stayed steady, while the number of seriously delinquent borrowers -- those who had missed at least two payments -- increased 10 percent, according to the report.

The mortgage data "continued to reflect negative trends influenced by weakness in economic conditions including high unemployment and declining home prices in weak housing markets," the report said.

The report also reflected the risks still posed by hundreds of thousands of risky home loans known as option adjustable-rate mortgages, which reset to significantly higher payments. With these "option ARMs," also known as pick-a-pay loans, a borrower chooses how much to pay each month, often less than the interest due. But the payments on these mortgages eventually rise significantly, putting the borrower at risk of losing the home.

More than 15 percent of these types of loans were seriously delinquent during the second quarter, compared with 5.3 percent of all mortgages, according to the report, and 10 percent were in the process of foreclosure. "The risks of these loans and geographic concentration caused them to perform significantly worse than the overall portfolio," the report said.

That's quite a hit even in spite of financial aid.
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot
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aftershock, foreclosure, looms

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