Coming Soon: Interest-Only Mortgage Defaults
Its amazing what passes for “news” in some places: There is an interesting albeit well-trod discussion in Wednesday’s NYT on the rising defaults om Interest Only Mortgages.
Data from First American CoreLogic shows that interest-only loans have a greater likelihood of default: Nationally, about 18% of prime interest-only loans are at least 60 days delinquent.
NYT excerpt:
“Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices. . .
Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.
The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset . . .”
Go figure: If banks give mortgages to people who cannot afford them, they tend to go in to default in large numbers.
Who ever could have foreseen that coming . . . ?
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Source:
The House Trap
DAVID STREITFELD
NYT, September 8, 2009
http://www.nytimes.com/2009/09/09/business/09loans.html
See also:
Fitch: $134B of U.S. Option ARM RMBS To Recast by 2011
Business, Wire, September 08, 2009
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090908006052
September 8th, 2009 at 10:43 pm
Sometimes, one just doesn’t have the energy to say it, but here goes:
Fire anyone involved in throwing away depositors’ money to deadbeats who can only pay interest on a loan.
It will fall on deaf ears, but when banksters began acting like loan sharks, they signed their own death warrant. Off with their cabezas.
September 8th, 2009 at 10:48 pm
The banks are in fine shape. Big money, big bonuses. Nothing to see here, ladies and gents, move along . . .
September 8th, 2009 at 10:52 pm
The Commercial Real Estate industry is no different in this regard. In fact, it’s even worse. Just keep rolling over that debt. “Pay off” debt with debt. As long you can make your payment to cover your interest, what’s the problem? What could go wrong? Nevermind inflated/distorted values. Who cares about a little thing like that in a Ponzi economy like ours. Again, what could go wrong?
Debt jubilee coming to a town near you.
September 8th, 2009 at 10:56 pm
Don’t buy stuff you can’t afford…
There used to be a great YOU TUBE link to that skit (with Steve Martin) from SNL…
I can’t find it anymore…
Hmm…I wonder if it was censored by the Administration who seems to actively encourage people to continue to buy things they can’t afford…
- like new cars for clunkers
- bank stocks
- campaign money
September 8th, 2009 at 10:59 pm
@cvienne: The idea of money is just a squishy concept anyway, according the About.com finance expert. No biggie.
September 8th, 2009 at 11:02 pm
This could get very interesting.
http://www.nytimes.com/2009/09/09/business/09bank.html?_r=1&hpw
September 8th, 2009 at 11:30 pm
cvienne, I saw that Steve Martin link! so again, I ask, what happened to common sense? this whole mortgage thing has me very upset… there once was a crucial rule in lending, the borrow was a sure bet to repay principal plus interest..
September 8th, 2009 at 11:31 pm
OT:
I’m sorry. But, this is unbelievable:
http://zerohedge.blogspot.com/2009/07/1-to-3-years-of-securities-recalls-aka.html
September 8th, 2009 at 11:35 pm
Can someone explain to me why the financial system collapsed?
September 8th, 2009 at 11:50 pm
jeff, thanks for that link.. i needed it before i put my head on my pillow..
insane, there is no collapse.. does your atm still work?? it’s the government sponsored, intravenous drug of the decade.
September 8th, 2009 at 11:56 pm
I would not be surprised if the Corelogic numbers are too low. They focus on the non-Fannie/Freddie market but Fannie/Freddie also had I/O options. $224 billion is currently in the book of business for Fannie and $144 billion at Freddie. They may have accounted for it but it is possible they didn’t.
This is a huge problem in CA, “affordability” products were the norm. And many timebombs are planted in every neighborhood.
Freddie still bought $377 million in I/O loans in Q2.. Fannie only $1 million.
People saw it coming at the time as well:
http://www.msnbc.msn.com/id/8171385/
http://www.forbes.com/2005/12/06/interest-only-mortgages-cx_lm_1207mortgage.html
http://www.businessweek.com/magazine/content/06_37/b4000001.htm
Fannie source:
http://www.fanniemae.com/ir/pdf/earnings/2009/q22009.pdf
Freddie Source:
http://www.freddiemac.com/investors/er/pdf/10q_2q09.pdf
September 9th, 2009 at 12:10 am
who could have seen it coming?
I know that’s a rhetorical question, but since I’m that guy who always answers rhetorical questions…
the answer is Tanta, at Calculated Risk. And I believe the word that NYT wants is “recast,” not “reset.” the problem isn’t that the rate is changing. The problem is that people are going to have to start making larger payments, which they won’t be able to afford, after which they’ll presumably mail their keys back to the bank and go live in a tent outside Sacramento.
http://www.calculatedriskblog.com/2008/08/reset-vs-recast-or-why-charts-dont.html
September 9th, 2009 at 12:11 am
I completely disagree Karen. There has been a total collapse in confidence. It has been papered over by the authorities in the short term, but we are seeing a shift in asset valuation as we speak. The idea that the U.S. government is going to guarantee $30T in obligations using nothing but a printing press is just as mad as lending a trillion dollars in interest-only mortgages to people who have no hope of paying it off.
All of the desperate actions of the past year are making their way through the system. When the consequences emerge, they will be just as nasty as your ATM not working.
September 9th, 2009 at 12:26 am
there are two things happening w/ the expiration of the interest only period of an interest only loan- one- the borrowers now have to pay the interest and principle on the original balance- and- two-
it is a reduced term- so if there was a 5 year i/o period- when the the 5 years is over- the borrower now pays p&i on the original balance for the remaining 25 years of the loan-
a double whammy happening at the same time
September 9th, 2009 at 12:32 am
What’s really funny is that at least some of these great big newspaper reporters probably really do think they’ve stumbled upon an amazing, groundbreaking new story here (and others like it). They worked so hard (said in whiney voice). It would be terrible to realize they got scooped by many months (if not years) by a blogger (gasp).
Of course some have just been stifled by their editors, who’ve been pinned down by their publishers, unable to tell the ugly, inconvenient truth.
September 9th, 2009 at 12:33 am
insane…
dude, it was sarcasm. karen is well informed of the fiasco.
September 9th, 2009 at 12:38 am
color me stupid bro….
September 9th, 2009 at 12:46 am
it’s alright. we all have our moments
especially here. cheers.
September 9th, 2009 at 1:22 am
“Go figure: If banks give mortgages to people who cannot afford them, they tend to go in to default in large numbers.
Who ever could have foreseen that coming . . . ?”
http://finance.yahoo.com/news/Taxpayers-face-heavy-losses-apf-529231473.html?x=0&sec=topStories&pos=main&asset=&ccode=
Taxpayers face heavy losses on auto bailout
…Ahh, yes. Who could have seen that coming? “Not I”, said Turkey-Lurkey…..
September 9th, 2009 at 1:59 am
don’t buy stuff you can’t afford. GE moved it over to Hulu.
http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff
September 9th, 2009 at 2:07 am
Shhhhh. Don’t tell that to the stock marktet. Just sell the USD and buy something – whatever you want (gold, oil or old fashioned SP500 futures.) As long as you do that, they got your back.
September 9th, 2009 at 2:11 am
Yep, and it’s just getting started. Note to self: how does one survive a deflationary black hole?
September 9th, 2009 at 11:40 am
Nobody in America should make another mortgage or credit payment. Heck, we should all refuse to pay our taxes as well. Let the corporations and corrupt government go hang themselves. We need a new system, and should stop supporting this one until we get it.
September 9th, 2009 at 2:14 pm
Treasury sees millions more foreclosures
Glenn Somerville and David Lawder
Reuters September 9, 2009, 1:53 pm EDT
http://finance.yahoo.com/news/Treasury-says-millions-more-rb-1620457917.html
Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration’s housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.
A Treasury report showed 360,165 people had their monthly payments reduced through August, up from 235,247 through July, but a senior Treasury official conceded much more must be done to soften the impact of a severe and prolonged housing crisis.
“The recent crisis in the housing sector has devastated families and communities across the country and is at the center of our financial crisis and economic downturn,” Michael Barr, assistant Treasury secretary for financial institutions, told a House Financial Services subcommittee.
Treasury has begun releasing monthly reports on the loan modification program, called the Home Affordable Modification Program, or HAMP, that it launched in February. At the time, it was suggested that millions of Americans might be able to get some relief through negotiations with their mortgage lenders.
But the program, which pays cash incentives to mortgage servicers to reduce monthly payments to 31 percent of a borrower’s income, is off to a relatively slow start.
In July, Treasury said that just 9 percent of the estimated number of homeowners eligible had had their payments reduced, so August’s 12 percent total represents only modest progress.
Barr said that Treasury was on track to achieve 500,000 trial modifications by November 1. The modification becomes permanent once a borrower makes three reduced monthly payments.
Barr said that “even if HAMP is a total success, we should still expect millions of foreclosures” as administration and industry efforts continue to stabilize a crisis-stricken housing sector.
BANKRUPTCY REVISION BILL THREATENED
Lawmakers expressed frustration at the slow progress as unemployment-driven foreclosures rise and threatened to revive so-called “cram-down” legislation that would allow bankruptcy judges to reduce mortgage loan amounts owed.
“I am disappointed at the pace of this program,” said Rep. Barney Frank, chairman of the Financial Services Committee.
The House last year passed a cram-down bill but it was defeated in the Senate, which at the time had a narrower Democratic majority.
“The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages,” said Frank. “If they do not improve their performance, then they improve the chances of that legislation.”
Barr said President Barack Obama supports the idea of allowing bankruptcy judges to alter mortgage terms, but “the first and best answer has got to be ‘let’s figure out a way of keeping people in their home with a modification’ and that’s where we’re focused.”
A Federal Reserve economist, however, said that an effective plan to mitigate foreclosures must deal with rising unemployed borrowers.
“Thirty one percent of an unemployed person’s income is often nothing. And a payment of zero will never be attractive to a lender,” Boston Federal Reserve Bank senior economist Paul Willen told the hearing.
Treasury said that 47 loan servicers have signed up for the loan modification program initiated by Treasury. But the Treasury report showed 21 had modified less than 5 percent of eligible troubled loans and several had not modified any.
The lender with the highest percentage of eligible loans modified was Saxon Mortgage Services Inc., at 39 percent. Bank of America (NYSE:BAC – News), one of the largest U.S. mortgage lenders and servicers, had modified just 7 percent of loans eligible for the program.
Barr said a strong housing market was “crucial” to a sustained U.S. economic recovery and noted that analysts say
more than six million Americans are at risk of foreclosure in the next three years.
“Much more remains to be done and we will continue to work with other agencies, regulators and the private sector to reach as many families as possible,” Barr said.