I thought these arm resets wouldn't affect the market!!!

care of NYT, fyi.

http://www.nytimes.com/2009/12/20/realestate/20cov.html?_r=1

arm resets and option arm recasts allegedly became a no-issue because everyone refi'd them. except of course, the people who REALLY needed to refi, because they couldn't, either due to lack of equity or lack of ability to qualify for a new loan. the banks did as many as they could, but there were a lot that didn't get done.

first loan arm resets aren't a problem, yet. but when interest rates rise, things could get fugly.

I like how they leave out all the important details. Here's what the Harvey the professional reporter says:

"Ms. LeStar, 30, moved to New York from Cincinnati on Sept. 9, 2001.... she took the job and, after a few years, decided to buy instead of rent."

Here's what inonada the looser (http://loseloose.com) has to say:

"Ms. LeStar bought in Sept. 2007. Mr. I "No" Nada wonders why Harvey translates 6 to "a few" and fails to mention that she bought at the top of the bubble."

Harvey says:

"Ms. LeStar consulted streeteasy.com for comparable neighborhood sales and settled on an asking price of $444,000.... Ms. LeStar’s background in finance made her comfortable in representing herself."

Looser inonada says:

"Ms. Lestar bought the place for $415,000. She consulted streeteasy.com and saw that the market had tanked 30% since she bought. That would put her place at $290,000. Losing that much would not work well for her. So she looked at some other random place that was listed for $450,000 since March 2008 and thought she could join that listing. She saw that recently-renovated apartments in her building were selling at $800 per square foot, putting her place at $325,000. Unfotunately, her bathroom and kitchen are not renovated. She decided to ignore it all and list at $444,000 so that she'd leave herself some room to negotiate so that she could get out full at $415,000. Ms. LeStar’s background in finance made her comfortable determining that she couldn't afford to pay upwards of $25K to brokers, so she figured she had to list it herself."

Interesting thing in the article is that the people selling themselves were bubble buyers, and the ones selling through brokers were not. Gee, Harvey, ever thought about mentioning that?

How is this about arm resets? Shouldn't the title be don't do a heloc if you can't refinance?

The seller's also in NY, not NJ, but why let facts get in the way of a good discussion?

Lol! You have a point.

LOL inonada. You're right, the $444K makes no sense, given the studio competition in her own building and nearby.

A broker might've told her to clear all the junk out of the place, if not for potential buyers then for a huge picture in the NYT.

Lots of ACRIS searches on "LeStar" today.

She seems like a fine person, it's just sad. She's been out of work for over a year (if I'm interpreting "last spring" and the author's prediliction for euphemism correctly), is probably not rich and can't spare the money, and is going to get a hard smack-down from the markets. That's the part of this bubble that is so sad: people take risks they don't understand with money they don't yet have (as in losing your future savings). At least with the 1990s stock bubble, people could lose no more than their life savings generally.

Inonada, your analysis on this article is brilliant. I agree that this whole mess is really sad. Since I'm in a sweet holiday mood (snow! yay!) I'm going to wish her a buyer for Christmas.

That's nice. And I believe in Santa.

Hilarious analysis. I agree it's sad, which is why it's wrong to reflate earth to save bubble buyers, because it will lead to even more sad stories in the future, and lure even more people to make foolish decisions along the way. Also, she sounds like a normal person doing what they thought was sensible, not getting greedy when she bought, and now, it's just wishful thinking as to pricing.

South Nyack is in NJ? I did not know that. I guess certain people here are in such a rush to bash NJ, that they have a bad habit of mistaking the Y in NY for a J.

Anything that close to NJ counts as NJ. Oh wait, Manhattan is closer to NJ. Crap.

Does that mean that northern NJ is part of the Upper West Side?

Always go for a self liquidating mtg. Balloons are always a risk. But with all the crap that went down with mortgages over the past 10 or so years, this is just another person getting screwed by their mtg. IMO, one can never assume that one can refi when the balloon is due.

ooops. meant NY in the first post. thanks for the corrections, yo.

"Does that mean that northern NJ is part of the Upper West Side?"

As far as us downtown folk are concerned, they are one and the same ;).

‘Toxic’ Mortgages Rally as Resets Accelerate: Credit Markets
2011-02-02 10:03:13.379 GMT

By Jody Shenn and Prashant Gopal
Feb. 2 (Bloomberg) -- Home loans that inflated the U.S.
housing bubble by giving borrowers the choice of cutting
interest payments in exchange for higher balances are fueling
the fastest gains in the mortgage-bond market.
Prices for senior bonds tied to option adjustable-rate
mortgages, called “toxic” by a government commission,
typically jumped 6 cents to 64 cents on the dollar in the past
month, according to Barclays Capital. The next best-performing
class of home-loan securities without government backing rose 4
cents. Option-ARM debt tumbled to as low as 33 cents in 2009.
Rising values show Federal Reserve efforts to stimulate the
economy by purchasing an additional $600 billion of Treasuries
and holding interest rates near zero percent are driving
investors into ever-riskier securities. Bond buyers are
overcoming a “mental hurdle” even as the debt is poised to
lead a second wave of rising payments for homeowners, according
to TCW Group Inc.
“As the rally matures, you’ve got to expect the more-
banged-up, more-feared, less-participated-in parts of the market
are going to eventually catch up,” said Bryan Whalen, co-head
of mortgage bonds at TCW, which oversees $115 billion.
The market is pricing in defaults on option ARMs of about
75 percent, according to hedge fund Metacapital Management LP in
New York. As the worst housing slump since the Great Depression
deepened, assumptions reached as high as 90 percent, said
Whalen, who’s based in Los Angeles.

Commercial Mortgage Bonds

Payment changes on option ARMs will lead adjustments on
$246 billion of mortgages in the next three years, according to
Barclays Capital. The amount, on loans among the $1.3 trillion
packaged into so-called non-agency mortgage securities, may top
out at $12 billion a month, rivaling the peak in payment resets
led by subprime loans in 2007.
“The outright level of defaults isn’t nearly as high as
people would have expected,” Whalen said. “There’s also some
comfort now that the resets aren’t nearly as onerous as people
had feared.”
Elsewhere in credit markets, the extra yield investors
demand to own company bonds worldwide instead of similar
maturity government debt fell 2 basis points to 160 basis
points, or 1.6 percentage points, according to Bank of America
Merrill Lynch’s Global Broad Market Corporate Index. Yields
averaged 4.005 percent, the highest since Dec. 16.

Morgan Stanley

Morgan Stanley and Bank of America Corp. are marketing
$1.55 billion of bonds backed by commercial mortgages as rising
investor demand makes it easier for property owners to refinance
debt. Opti Canada Inc.’s securities tumbled on concern the oil-
sands producer may run out of money to operate a site. Gymboree
Corp. plans to relax terms of its credit agreement as loan
prices hovered at about the highest level in more than three
years.
Loans tied to shopping centers and malls account for 43.6
percent of the offering from Morgan Stanley and Bank of America,
according to a person familiar with the transaction. Office
buildings make up 28 percent, said the person, who declined to
be identified because terms aren’t public.
Sales of commercial-mortgage backed securities will rise to
$45 billion this year, after banks arranged $11.5 billion of the
debt in 2010, according to JPMorgan Chase & Co. Issuance plunged
to $3.4 billion in 2009, choking off financing to property
owners, after reaching a record $234 billion in 2007, according
to data compiled by Bloomberg.

Most Active

Bonds from Fairfield, Connecticut-based General Electric
Co. were the most actively traded U.S. corporate securities by
dealers with 173 trades of $1 million or more, according to
Trace, the bond-price reporting system of the Financial Industry
Regulatory Authority.
The most actively traded high-yield bonds were Opti
Canada’s securities with 152 trades. Its $1 billion of 8.25
percent senior secured notes due in December 2014 fell 4.25
cents to 55.75 cents on the dollar, Trace data show. The debt
plunged as the Calgary-based firm said it hired Lazard Freres &
Co. to review a possible sale, merger or other “alternatives.”
High-yield bonds and loans are rated below Baa3 by Moody’s
Investors Service and BBB- by Standard & Poor’s.
The cost of insuring against default on European high-yield
corporate bonds fell to the lowest level since April, according
to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Index of 50
companies with mostly high-yield credit ratings declined 5 basis
points to 400, according to JPMorgan Chase & Co.

Sovereign Debt

The cost of insuring the region’s sovereign debt also fell,
with the Markit iTraxx SovX Western Europe Index of swaps on 15
governments dropping 9 basis points to 157, the lowest since
Oct. 29, according to Markit Group Ltd.
The measures typically decline as investor confidence
improves and rise as it deteriorates. Credit swaps pay the buyer
face value if a borrower fails to meet its obligations, less the
value of the defaulted debt. A basis point equals $1,000
annually on a contract protecting $10 million of debt.
Gymboree, the San Francisco-based children’s clothing
retailer, will refinance debt used for its $1.8 billion buyout
by Bain Capital LLC in November. The company said in a statement
it will replace its $820 million loan with one that has no
financial maintenance covenants.

Leveraged Loans

Borrowers are improving the terms of their bank agreements
after the S&P/LSTA US Leveraged Loan 100 Index climbed 5.23
cents to 92.91 cents on the dollar in 2010. The index, which
tracks the 100 largest dollar-denominated first-lien leveraged
loans, rose 0.04 cent to 95.98 cents on the dollar, 0.02 cent
below the three-year high reached on Jan. 27.
In emerging markets, relative yields narrowed 15 basis
points to 255 basis points, the biggest decline since Dec. 14,
as Egyptian President Hosni Mubarak said he would step down in
September, according to JPMorgan index data. The measure soared
35 basis points in the prior three days as protests escalated in
Egypt.
Option ARMs may allow homeowners to pay less than the
interest due on their loans each month, potentially adding to
the principal owed and in some cases more than doubling
payments. The loans were among the “toxic” debt the Financial
Crisis Inquiry Commission said was at the center of the
“corrosion of mortgage-lending standards.”

‘Mortgage Disaster’

Hedge-fund manager Whitney Tilson’s warnings about the
projected wave of increasing payments not linked to subprime
borrowers were included in a December 2008 report on CBS Corp.’s
“60 Minutes.” The segment was called “A Second Mortgage
Disaster on the Horizon?”
While adding to housing’s challenges, the damage may be
limited because borrowers have already fallen delinquent on
almost half of remaining option ARMs and short-term rates held
down by the Fed have shrunk the payment increases that
homeowners face to about 30 percent to 40 percent, according to
Barclays Capital.
Any jump in benchmark rates may cause bigger payment
increases within the next two years, so “there are still a few
‘ifs’ there, but this should be manageable,” Jasraj Vaidya, one
of the bank’s New York-based strategists, said in a telephone
interview.
An index tied to one-year Treasury yields commonly used as
a benchmark for option ARMs is at 0.29 percent, down from almost
5 percent at the start of 2007, Bloomberg data show.

Benchmark Rates

Benchmark rates also affect whether or by how much
borrowers who make minimum payments are failing to cover the
interest owed. Any differences are tacked on to their balances.
Required payments typically begin changing after 5 or 10 years,
or when the loans grow by a certain amount, often 10 or 25
percent.
“There is a payment shock, and in some cases, it’s
reasonably high, but it’s still far less than what was likely
when these loans were taken out,” said Deepak Narula, head of
Metacapital, which oversees $500 million.
Option-ARM bonds’ loss-adjusted yields have fallen to 5 to
6 percent, according to Barclays Capital, which said in a Jan.
28 report that the recent rally means it may make sense to start
“selectively selling.”
The yields, which vary based on the forecasted timing and
amount of defaults and costs of foreclosures, are probably
closer to 7 to 9 percent, according to TCW’s Whalen, who helps
oversee about $35 billion of mortgage debt.

Financial Crisis

Bank of America, Wells Fargo & Co. and JPMorgan became the
biggest owners of option ARMs during the financial crisis and
say they are modifying many of the loans to help borrowers, in
some cases under agreements with U.S. states.
JPMorgan, which has reworked about a quarter of the $40
billion of option ARMs it inherited from Washington Mutual Inc.,
will probably adjust terms on an additional $2 billion to $4
billion before their payments reset, said David Lowman, head of
the company’s home-loan unit.
“We literally pre-approve people and send them a piece of
mail that says, ‘We’re going to allow you to continue paying
what you do now,’” he said. “As you might expect when banks
make a great offer like that, people tend to take us up on it.”
While Bank of America faces “particular concerns
pertaining to the option-ARM portfolio,” including high loan-
to-value ratios and delinquencies, the lender hasn’t seen and
doesn’t expect “a catastrophic number of defaults” caused by
payment changes, Rick Simon, a spokesman, said in an e-mail.
Of option ARMs that came with Countrywide Financial Corp.
and have adjusted, “more than half experienced less than a 20
percent payment increase, and many experienced a payment
decrease,” he said. “The same is forecast for 2011.”

Negative Equity

Tilson, co-founder of hedge fund T2 Partners LLC and co-
author in 2009 of “More Mortgage Meltdown,” says a housing
“double-dip” has already begun, citing an S&P/Case-Shiller
index that fell 3.4 percent in the four months through November.
Tilson is now less concerned about mortgage resets than
homeowners who owe more than their properties are worth, he
wrote in an e-mail. The failure of banks to mark down home-
equity loans is the “biggest stumbling block” to curing so-
called negative equity, Tilson said Dec. 2 at a Bloomberg Link
conference.
“People will stop paying because it’s in their economic
interest to stop paying when you’re underwater,” Tilson said at
the conference.
Of $175 billion of option-ARM securities outstanding, $74.1
billion have never been delinquent and 63 percent of those
borrowers owe more than their homes’ value, according to Amherst
Securities Group LP data. Underwater borrowers account for 36
percent of the $680 billion of never-delinquent debt held by all
non-agency mortgage bonds.

Cutting Balances

JPMorgan is reducing some option-ARM balances down to about
115 percent of homes’ current values, Lowman said. That’s
because option ARMs start with low initial payments, making it
difficult to maintain borrowers’ monthly bills by only lowering
their rates and stretching the loans’ maturities, he said.
“What matters is getting the person’s payment in line with
what they can afford,” Lowman said. “There’s many people who
live in California whose houses are upside down; fortunately,
the super-majority are keeping up with their payments.”
Wells Fargo, in an agreement with California announced in
December, said its option-ARM borrowers in the state may be able
to earn principal reductions by making on-time payments.
The company said it had already struck deals over the
loans, which it bought with Wachovia Corp., with nine other
states, and has “extended significant home payment relief to
more than 50,000 at-risk” option ARM customers in California
from the start of 2009. Vickee Adams, a bank spokeswoman,
declined to comment.

"The market is pricing in defaults on option ARMs of about 75 percent.... As the worst housing slump since the Great Depression deepened, assumptions reached as high as 90 percent."

75 percent is still an astonishing number, and entirely deserving of the "toxic" label. 90 percent is more like "instantly fatal". The good news for the market is that big banks are keeping some people in their homes, at least for a while.

The option arm story turned out to be a dud. The theory was they would experience huge defaults when they hit recast, but that turned out to be false. These things blew up almost immediately. The ones that did not got modified or refinanced. I'm not saying these have turned out be high quality mortgages, but only that anyone expecting a huge wave of defaults from this product as it hits peak recast time is just wrong.