Originally posted by: Jhhnn
Originally posted by: LegendKiller
I agree that most of the biggest problems have run their course. Option arms, subprime, and NINJAs are the biggest problem. Alt-As are largely jumbos or low-doc. ARMs that recast are going to be fine, especially considering the low rates right now.
Dunno about that, LK. We may have a bit of a breather in 2009, but it's far from over wrt option ARM's- it's only just beginning.
http://bp3.blogger.com/_pMscxx.../s1600-h/IMFresets.jpg
http://calculatedrisk.blogspot...r-why-charts-dont.html
As people pay the minimum on option ARM's, as I understand it, then the reset/ recast date comes closer... lots of these loans are also at "teaser" rates, as well. Even though rates are low now, that won't help a helluva lot for people with those loans- rates aren't that low...
And when they're upside down on the valuation, no other lender will touch 'em...
This isn't going away anytime RSN....
There's a couple problems with that graph....
1. It doesn't count in the maximum capitalized portion of interest. Usually this was ~20% of the original loan balance and, AFAIK, you get charged interest on the capitalized interest. Thus, your 20% cap is actually lower.
2. It doesn't count in people who're already in payment pressure because of #1 and, who couldn't originally support the house long-term inside of the interest period anyway. Thus, you get washout from two perspectives.
3. It doesn't count already refinanced people, who are taking advantage of low rates.
4. It doesn't count already defaulted obligors.
A lot of people were taking option arms as a way to play the market but can refi easily. I've never seen that type of analysis but I suspect things aren't as bad.
It's interesting that because the above factors, the recasts are being distributed and are becoming more front-loaded. The nice thing about that is that even with recasting they'll have a locked amount that'll be recasted, not to mention mortgage rates are very low. Those factors should cushion the blow.
Also keep in mind that much of the write-downs already seen in the mortgage market have already factored these things in. That's why Option Arm and other products are already discounted so heavily. If anything, these scenarios could be very bearish compared to what will happen. As a result, purchasers of RMBS in these areas could realize far higher returns than the market is giving credit for in this very bearish environment.
That's one big reason why Tillson, who has performed some of the most detailed analysis of this situation in the whole market, is actually bearish on stocks long-term.
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