U.S. "option" mortgages to explode, officials warn

[nmap]

I wonder - were those green shoots really poison ivy?

LINK

WASHINGTON (Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
"That's the next round of potential foreclosures in our country," he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, 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."

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy borrowers that fed the first wave of the financial crisis.

Miller said option-ARMs were discussed at Tuesday's meeting on mortgage scams, which brought state attorneys general from across the country together with U.S. Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, and Federal Trade Commission Chairman Jon Leibowitz.

The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

Goddard said his office is investigating hundreds of cases where companies have made fraudulent promises, and charged large fees, to mortgage defaulters.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.

Real estate data firm RealtyTrac, in its August 2009 U.S. Foreclosure Market Report, said foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago.

The report said one in every 357 U.S. housing units received a foreclosure filing last month.

[Ret10Echo]

Well I suppose the next thing is mortgage IOUs with Barney Frank's photo on the front....

[ZonieDiver]

deleted

[nmap]

Housing is going to have some challenges.

Americans have seen their houses as both investment and homes. This, combined with low interest rates and lower loan standards caused prices to increase above the norms - which encouraged the dangerous view that houses were dependable investments that would never decline in price.

We will revert to the mean - to normal prices, with average house prices equal to about three times income. Personal note: I purchased my house back in 1975, and those were the loan guidelines. The interest rate was 10%.

Unfortunately, reversions to the mean don't stop there - they tend to overshoot and go past the mean. So when houses get to about three times average income, we'll be close to reasonable prices - but prices may go even lower for a time. Unfortunately, this will destroy most of the asset base for a great many people - including boomers who focused on an ever-appreciating house value to fund their retirements.

This destruction of wealth will have nasty consequences - not least of which will be grandpa and grandma moving in with the grandkids.

Change...ahh, yes, change. Looks like we'll get a generous portion of that.

LINK

Excerpt:

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."

LINK 2

Brief Excerpt 2:

BOSTON (MarketWatch) -- Moody's Investors Service threw cold water on optimistic projections of a V-shaped recovery in the battered U.S. housing market, predicting it could take more than 10 years to get back to boom-level prices.

"For many reasons, the rebound will be disproportionately small compared to the decline," Moody's said this week in its latest outlook on the residential market. "It will take more than a decade to completely recover from the 40% peak-to-trough decline in national home prices."

[Pete]

And NC laughed at Fort Bragg & Fayetteville for years.

Too bad, Oh so sad, North Carolina - our little market continues to perk along at a slow but steady rate.

Now I'm not saying we don't have anybody around here in a house too big for them but for the most part we're perkin' right along.

Even our unemployment numbers are buffered through the military related jobs they don't like to count.

[Sigaba]

FWIW, last spring, The Economist asked some hard questions about the social and economic consequences of home ownership in America and Europe. That piece is available here.

Originally Posted by nmap

This destruction of wealth will have nasty consequences - not least of which will be grandpa and grandma moving in with the grandkids.

It will be interesting to see if the cultural conventions that have developed over the last fifty years or so to mediate generational social conflict will be equal to the task of generations of families living in close quarters on a national scale. The House of Skywalker managed to work things out but will the Smiths? (And I'm not talking about Will Smith and his loudmouth wife. <<LINK>>)

[afchic]

Originally Posted by Pete

And NC laughed at Fort Bragg & Fayetteville for years.

Too bad, Oh so sad, North Carolina - our little market continues to perk along at a slow but steady rate.

Now I'm not saying we don't have anybody around here in a house too big for them but for the most part we're perkin' right along.

Even our unemployment numbers are buffered through the military related jobs they don't like to count.

I think this is true for many military towns. Here in our little town, you still have to wait an hour or so most nights to get into a restaurant after about 5. We refinanced the house this summer, and although it hadn't appreciated as much as I had hoped in the past 4 years, it is still worth about $15K more than we paid for it. There are NO foreclosures in our neighborhood. Sure there are plenty of houses that are for sale because of the summer PCS cycle, and they are staying on the market longer than usual, but they are not going into foreclosure.

Us people in the military that are too stupid to do anything else, seem to be fairing a bit better than all those smart educated folks. I wonder why that is???? I wonder if John Kerry can offer his perspective on that?

[Surf n Turf]

Originally Posted by afchic

Here in Us people in the military that are too stupid to do anything else, seem to be fairing a bit better than all those smart educated folks. I wonder why that is???? I wonder if John Kerry can offer his perspective on that?

Touché

SnT

[nmap]

Originally Posted by afchic

I wonder why that is????

MOO - but the answer might have something to do with honesty and integrity.

[nmap]

Originally Posted by Broadsword2004

Ten times!? How does one purchase a home where the payments will reset to ten times what you are paying?? Or even five times?

Here's a LINK

They bought a house at a low rate - say, 1.5%. For an interest only payment, that's $312 per month on a $250,000 house. The difference between that and the real rate of 5.5% is added to the debt. So the debt increases each month.

After 2 1/2 years, the loan goes to a regular amortizing loan at 5.5% - and the debt has increased to $275,000. Payments are now $1,618 per month.

Originally Posted by Broadsword2004

Why did they laugh...? Was it viewed that the people of Fort Bragg and Fayetteville were stupid or foolish or something...?

The widespread underlying assumption was that real estate prices would always go up. So if we make that assumption, then getting the most house you can possibly afford, at the highest possible leverage is a good idea.

Using the example above, suppose we buy the house at $ 250M with nothing down and pay $312 per month. Suppose it appreciates at 10% per year. 2 1/2 years later, the house is worth about $317 M. After the debt, we have a profit of $42,000 on nothing invested and a mere $312 per month. Notice how this generates money for nothing - as long as the underlying assumption is true. Furthermore, there is the notion that one can always refinance and get those low payments for another 2 1/2 years.

So - huge profits, live large, low payments, nothing down. And then there were those folks in Fort Bragg and Fayetteville who just didn't get it, who plodded along paying their bills when they could have been getting rich using the Great American Dream Machine!

However - bubbles always fail. Prices revert to the mean - always. And the underlying assumption of growth forever failed, at which time all of that leverage reacted with a vengeance.

To put this in perspective, ordinary unsophisticated buyers, generally with few other assets and rather ordinary income were investing with leverage rates greater than commodity futures or options. And they did so in the belief that they could not lose money, and that the underlying prices would never go down. It is insanity; but it was widespread, pervasive, and lasted long enough to make very big problems.

Originally Posted by Broadsword2004

Also, these mortgages resetting sounds like it will be a big hit on the economy, why would folks like Bernanke be saying the recession is over?

Because they're trying to improve consumer and business confidence.

Let's suppose that Bernanke started talking like I do - doom, gloom, the end is nigh, that sort of thing. What would happen? Consumers would quit buying houses or anything else. Businesses would lay off workers. Banks would refuse to lend. The global economy would lock down and we would slide into the greater depression. (Perhaps this is one of the reasons the POTUS didn't invite me to apply for the Fed Chairman job....)

What he wants to do is to persuade consumers to start buying and businesses to start hiring. This will tend to bring house prices up, which means all the bad debt on the bank books will no longer be quite so toxic. Their theory is that with a combination of stimulus money and verbal urging, we can avoid a depression and end the recession earlier than otherwise.

In essence, I suggest that the gentleman lies - but for a good cause. Perhaps this is a challenge any senior leader faces. Does one tell the pure, undiluted truth, or does one craft one's message to manipulate others, with the intention of doing it for the greater good? I'll leave that one for heads wiser than mine.

Can they do so? Historically, no one can stop a bear market - not in stocks, and not in housing. But Bernanke and the others have used every weapon in the arsenal to fight this battle, and they've done so at levels never seen before. So...have the succeeded? Have they merely drawn out the process, ala Japan? Or have they increased total debt and thus made the ultimate day of reckoning - perhaps a couple years from now - even more painful? That remains indeterminate. Time will tell.

[Paslode]

Originally Posted by nmap

Here's a LINK

Because they're trying to improve consumer and business confidence.

Let's suppose that Bernanke started talking like I do - doom, gloom, the end is nigh, that sort of thing. What would happen? Consumers would quit buying houses or anything else. Businesses would lay off workers. Banks would refuse to lend. The global economy would lock down and we would slide into the greater depression.

What he wants to do is to persuade consumers to start buying and businesses to start hiring. This will tend to bring house prices up, which means all the bad debt on the bank books will no longer be quite so toxic. Their theory is that with a combination of stimulus money and verbal urging, we can avoid a depression and end the recession earlier than otherwise.

In essence, I suggest that the gentleman lies - but for a good cause. Perhaps this is a challenge any senior leader faces. Does one tell the pure, undiluted truth, or does one craft one's message to manipulate others, with the intention of doing it for the greater good? I'll leave that one for heads wiser than mine.

Can they do so? Historically, no one can stop a bear market - not in stocks, and not in housing. But Bernanke and the others have used every weapon in the arsenal to fight this battle, and they've done so at levels never seen before. So...have the succeeded? Have they merely drawn out the process, ala Japan? Or have they increased total debt and thus made the ultimate day of reckoning - perhaps a couple years from now - even more painful? That remains indeterminate. Time will tell.

Unless your the Repo man or Pawn Shop, I would suggest that most businesses have to look no further than their profit/loss statements from the prior three years and year to date 09 to conclude things are not all that rosie and what appear as blooms are in fact artificial blossoms that will deteriorate once exposed to UV.

In my mind, what Bernanke & Co are doing is no different than telling your wife to spend as usual when you are facing a dramatic loss of income....and you go out on a limb and 'hope' it will turn around. And if it doesn't turn around who is is going to come to the rescue?

Personally, I'd rather he him tell the blunt facts and face a looming disaster with my eyes wide open.

Nearly 10% unemployment, nearly 15 million folks 'on paper' and rising. It will level off and everything will be peachy How can you ever think about putting them back to work when we manufacture little to nothing and thus have few tangible goods sell?

15 million more on the .GOV dole, 15 more million of uninsured.......15 million might be a good start to promote a socialist collective system.

[Pete]

From this morning's Fayetteville Observer

Fayetteville's two faces

http://www.fayobserver.com/Articles/2009/09/20/930801

"Imagine you are a civilian employee of Forces Command in Atlanta. Your job is moving to Fort Bragg. If you want to keep it, you have to move as well.

Now imagine that you have two guides who will show you around the Fayetteville area. We'll call the first one the optimist......................"

An interesting article about the town.

As the 4th largest metropolitan area; Ft Bragg, Fayetteville, Hope Mills, Spring Lake, in the state we still don't have our own national TV station. The ABC and CBS stations from other cities have an office here. So talking about Fayetteville - if it Bleeds it Leads. Even Wilmington has its own station. We have Channel 14.

The basic story of Fayetteville is we missed the bubble. As Charlotte, the Triad area and coastal markets were taking off we were just perking along at our normal pace. Banking in Charlotte, Drugs up in the Triad and vacation homes at the beach drove the real estate bubble in those areas.

Us? No big companies wanted to move here. We were that hick military town area. So we perked along, no bubble. But when the bust came we were still perking along. The talk here is that we continue to perk along at about 1-2% a year.

So depending on the county, area and subdivision, on average - lot of variables there, if you buy a home and live in it only three years and sell paying a real estate standard commission you'll just about break even.

[alright4u]

First we had the CRA. Then we had more and more banks with less assets forced to make CRA loans. Now we have some more creative financing out there in the housing market. Looks like more NINJA crap to me.

This creative financing crap will never stop with this Congress nor is it limited to just housing IMO.

[GratefulCitizen]

The housing boom always seemed a bit odd to me.

Unless you buy and sell certain things for a living, you're probably going to end up on the losing end of most trades.

Never understood the "asset" mindset towards home ownership.

Yeah, it's an asset alright.
The bank's asset.

My home is a liability.
It just happens to be a better economic choice of liability than renting would be.

<shrug>
I dunno what to think.

[Smokin Joe]

Originally Posted by GratefulCitizen

<shrug>
I dunno what to think.

Follow nmap's advice....

Decrease your debt and increase your equity. Once you have maxed those out rat hole as much cash as you can.