Crazy Aunt in the Attic Revisted
Therereally has not been much mentioned in the MSM about one of the CrazyAunts, pay option ARMS, made almost exclusively to “prime” borrowers.The LA Times finally got around to writing a good articleabout them. One of the data points I was wondering about was mentioned,and that’s the number of Crazies who are making minimum payments. Theanswer is a rather stunning 75%. This means that negative amortizationis piling on to pay option ARMs loan balances at the rate of 4-5% ayear.
In fact, more than 75% of option ARM borrowers have beenmaking only the minimum payments, analysts at Standard & Poor’sCorp. said last week.
As payment requirements are scant, delinquencies have beenrelatively contained to date. Since nobody has ever made any realattempt to discount the future beyond the three month old data releasedby financial firms, this Crazy Aunt has stayed in the attic. But behindclosed doors she is ripping all the bathroom fixtures off the walls.
The initial low payments on option ARMs have kept a lidon serious delinquencies — 3.7% of all option ARMs, Standard &Poor’s analysts said in a report last week. That’s higher than before,but still low compared with the 6.3% delinquency rate on loans togood-credit borrowers with so-called hybrid ARMs, which have a lowfixed rate for two to 10 years before becoming adjustable-rate loans.
Of course it doesn’t take rocket science to see that these are timebombs. Pay option ARMs almost always have two trigger points when they“suddenly” revert to regular amortization loans. At that point monthlypayments will at least double. Those triggers are when the loan balancereaches 110% and 115% of the initial loan balance. I have never beenable to locate the data on how many are 110s versus 115, so let’s justassume 50/50. If it’s 110%, you can look at the next chart, and seewhen 75% of the amounts will reset. 4-5% a year of neg am means 2-2.5years for 110ers, and 3-4 years for 115ers. 75% making minimum paymentsfrom the 2005 group is $180 billion. Late 2008-2009 becomes the triggerfor the 115ers, and starting late 2007 for the 110ers. But then comesthe 110ers in the 2006 cohort, followed by the 115ers going into 2009.Some of the 2006 110ers will start triggering in late 2008. The amountsinvolved are not as much as for subprime, but more lethal to thelender, as the loan balance has increased significantly. And actuallythe later resets with 115% triggers will be even worse for the lenders,promising lousy recoveries.
Of course this is just the effect of the additional balances. Even the lagging housing price reporters like Shiller have finally been using 6.1%national price drops on their Big Chief writing tablets. In localeswhere neg ams are used aggressively it’s even more. So even using thatludicrous Shiller estimate, we begin to see just how underwater theseloans are. And connecting the dots on affordability comes this from Christopher Thornberg on California prices.
By 2006, the cost of that same house doubled, to$540,000 — pushed by unbridled speculation fueled by unparalleledaccess to mortgage capital. But median income rose a paltry 15%. Sotoday that same set of costs come to 60% of gross income.
Incredibly the minds like steel traps at Countrywide et al, or moreaccurately their financiers, have come to the realization that thisjust doesn’t add up, and have closed the barn door on the whole tawdryaffair.
Had those guidelines been in effect previously,Countrywide recently said, it would have rejected 89% of the option ARMloans it made in 2006, amounting to $64 billion, and $74 billion, or83%, of those it made in 2005.
The LA Times article doesn’t provide much on just how pervasivethese loans are in California and other high toxin locales. So allow meto finish that task. Also loan to values made at the market peak, realCrazy Aunt stuff.
