ARM's - the next wave!

[Michael]

Anyone following the ARM issue?

So far, the crashing of a couple million subprime mortgages was enough to bring Wall Street down to its knees.

How do you think they are going to handle 8 to 14 million ARM forclosures over the next two years?

Apparently the "subprime" stuff was only the tip of the iceburg.

[Dominick]

Anyone following the ARM issue?

So far, the crashing of a couple million subprime mortgages was enough to bring Wall Street down to its knees.

How do you think they are going to handle 8 to 14 million ARM forclosures over the next two years?

Apparently the "subprime" stuff was only the tip of the iceburg.
An iceburg would be a city made out of ice. You have one word in English that's actually Dutch and still insist on spelling it wrong :(

[Michael]

An iceburg would be a city made out of ice. You have one word in English that's actually Dutch and still insist on spelling it wrong :(
You mean that "clogs" are not Dutch? :eek:

Anyway, the mountain of ARM mortgage debt is like a city made of ice - in a world of global warming! :D

[Michael]

Here's a nifty little graphic that spells out the magnitude of this problem...

(credit to Eschaton aka Atrios)

Notice on the red-graph - the problem doesn't even start to show up until the 3rd quarter of 2009 and then gets seriously nasty in 2010 and 2011.

[Americano]

Anyone following the ARM issue?

So far, the crashing of a couple million subprime mortgages was enough to bring Wall Street down to its knees.

How do you think they are going to handle 8 to 14 million ARM forclosures over the next two years?

Apparently the "subprime" stuff was only the tip of the iceburg.

That's just ARMs and doesn't include a few million interest only loans scheduled to convert to conventional mortgages in 2010/11.

I've been saying we've only seen the tip of the foreclosure iceberg.

A friend recently went to refinance his home to take advantage of the lower mortgage rates and was shocked to learn he 'didn't make enough money to qualify'. The bank wanted a gross income that's four times the mortgage payment, two years of tax returns, his most recent quarterly tax deposits and a bank account with six-months of the new payments on deposit.

Even when prudent lending standards were still being followed prior to the no doc fiasco a payment requirement equaling of 35% of gross income was considered 'harsh'. If the US is depending on the housing industry to restore economic growth someone has best tell the banks.

[Greendruid]

I still don't speak economic-ese. What the hell is an ARM?

From the context I'm assuming something like:

Automatically
Renewing
Mortgage

or

Anally
Rammed
Mortgage

is another possibility.

Either way, please give me an inside loop into what it stands for and additionally what it even means would also be good.

[The Drunk Guy]

I still don't speak economic-ese. What the hell is an ARM?

From the context I'm assuming something like:

Automatically
Renewing
Mortgage

or

Anally
Rammed
Mortgage

is another possibility.

Either way, please give me an inside loop into what it stands for and additionally what it even means would also be good.
Adjustable Rate Mortgage -- People get the loan because the interest rate is initially competitive, but, after a year or so, it is subject to the market.

Let's say someone took out this mortgage in 2005: It was probably a competitive rate at that time, maybe 6.9%. Well, now that the mortgage world has taken a shit on the chest of America, that same loan could have a rate as high as 20.99% if the buyer was dumb enough to allow that possibility.

Most ARMs (that aren't subprime) have a flexibility range. Buyers with good credit could have had a range from 5.99% to, say, 13.99%. Buyers with poor credit could be looking at a range from 9.99% to 25.99%.

An ARM is dangerous because it means that, pending on the market, your monthly mortgage payment could leap several hundred dollars after your rate has adjusted. Imagine signing up for a mortgage payment of $715 and getting a new payment book that has you paying $1295 each month.

So, yes, Anally Rammed Mortgage is very close.

[Michael]

Adjustable Rate Mortgage -- People get the loan because the interest rate is initially competitive, but, after a year or so, it is subject to the market.
Yes, these are them. Only one point to add here...

Many ARM's have longer initial terms before the trouble hits - low monthly rates for the first one, two or even three years before the 'reset' hits and rate jumps. These ARM's often have below market rates for the initial phase of the mortgage (teaser rates).

The key point of the issue is the estimated fact that 30-40% of these mortgages are presently 'underwater'.

*Underwater is a term meaning the money owed on the mortgage/property exceeds the market value of the property. This is significant in the USA because some US/state laws allow one to legally 'walk-away' at this point (drop the keys off at the bank and just walk away from the property).

Btw, "cram-down" legislation just failed to pass Congress - the bill is dead (the powerful Wall Street Banking lobby killed it). This bill would have empowered debt arbitrators to force revisions to existing (individual) mortgage contracts to prevent foreclosures.

[Americano]

Yes, these are them. Only one point to add here...

Many ARM's have longer initial terms before the trouble hits - low monthly rates for the first one, two or even three years before the 'reset' hits and rate jumps. These ARM's often have below market rates for the initial phase of the mortgage (teaser rates).

The key point of the issue is the estimated fact that 30-40% of these mortgages are presently 'underwater'.

*Underwater is a term meaning the money owed on the mortgage/property exceeds the market value of the property. This is significant in the USA because some US/state laws allow one to legally 'walk-away' at this point (drop the keys off at the bank and just walk away from the property).

Btw, "cram-down" legislation just failed to pass Congress - the bill is dead (the powerful Wall Street Banking lobby killed it). This bill would have empowered debt arbitrators to force revisions to existing (individual) mortgage contracts to prevent foreclosures.

You think only 30-40% are underwater? I don't have any numbers but everything I read says market values are continuing to drop in virtually every market.

[Michael]

You think only 30-40% are underwater? I don't have any numbers but everything I read says market values are continuing to drop in virtually every market.
I'm just repeating numbers I've read from Calculated Risk website on the issue. I never question their numbers.

[Greendruid]

Ah - good to know that it's not something I signed up for then. Indeed, the rates are lower on those in the beginning. When we were buying our house I was thinking, "What kind of an idiot allows their budget to be subject to the whims of what is essentially gambling, i.e., the stock market and the economy, when you can have an assured monthly amount with a locked-in mortgage rate for anywhere from 2 to 15 years depending on the "products" available?"

An ARM didn't make sense to me then and I guess I was (remarkably) right in this case. I say remarkably because I'm notoriously bad at making economic decisions in general.

[Michael]

Ah - good to know that it's not something I signed up for then.
Many of these 'innovative mortgage products' are unique to the USA and are not always legal in Canada (or anywhere else for that matter!).

Canada has pretty strict financial laws that define how mortgages can be structured and sold to the public - much more 'conservative' than in the USA in this respect.

Thus, there was never any danger of you being able to buy one of these nasty 'back-end-loaded' mortgages. Nor could have gotten one of those 'document free' mortgages, nor could you get a mortgage with zero down, nor could you get a mortgage that allowed amortization above 35 years. This is all illegal in Canada (though the federal Conservatives under Harper attempted to change the regulations to permit some of these rules in 2006 and only backed off as the US mortgage data started showing big trouble in August 2006 - just in time to stop the regulatory changes in Canada from taking place).

[Greendruid]

Thus, there was never any danger of you being able to buy one of these nasty 'back-end-loaded' mortgages. Nor could have gotten one of those 'document free' mortgages, nor could you get a mortgage with zero down, nor could you get a mortgage that allowed amortization above 35 years. This is all illegal in Canada.

Actually, we did get a mortgage with zero down. At the time (2006), first-time Canadian home buyers were allowed this luxury. I don't think that option exists anymore though. On the flipside, I have seen 30 and 35 year products rolling out since then. They were almost available in 2006 but not with zero down. If you're wondering why we put zero down BTW, we just didn't have the lump sum capital at the time but knew that if the job held up we'd be plenty able to afford the mortgage. I had just finished my PhD and the wife was almost done her MA - we were largely broke after we moved 6,000 km across the continent too! Putting something down would have been preferred but it was pretty much an all-tapped out situation and the property was a steal. Let's just say that I paid half of what this property is worth today. That was only three years ago! We will never sell if we don't have to though.

[Michael]

30 and 35 years are and always have been pretty standard. It is the 40year product that has been a recent innovation (and a not very good one).

And yes, you can do a 'zero-down' under some very specific circumstances, but that still goes on the books as a 1st and 2nd mortgage rolled together (I'm betting on this, I don't have specific info on it). That's a technical distinction that really wouldn't matter to the buyer, only the 'holder' of the mortgage in order of claim.

[drgoodtrips]

30 and 35 years are and always have been pretty standard. It is the 40year product that has been a recent innovation (and a not very good one).

And yes, you can do a 'zero-down' under some very specific circumstances, but that still goes on the books as a 1st and 2nd mortgage rolled together (I'm betting on this, I don't have specific info on it). That's a technical distinction that really wouldn't matter to the buyer, only the 'holder' of the mortgage in order of claim.

FWIW, I put nothing down on my mortgage and there is only one mortgage. This was part of some kind of nifty little package for first time home buyers with very good credit. I could have put some money down, but I didn't have any real incentive to do so. Unless I put 20% down I still have to pay mortgage insurance and I was only realistically looking at being able to put 5-10% down. So, I figured I'd keep myself more liquid, since it cost me nothing to do that.