Much press has been given to the vague looming threat posed by adjustable subprime loans. The fear is that foreclosures, already rising quickly nationwide, will spike even higher as low introductory rates end on millions of mortgages.
Robert Lacoursiere, an analyst with Bank of America, back in June wrote a report that documented the threat, writing that “$515 billion of ARMs are scheduled to reset in ‘07, followed by approximately $680 billion in ‘08. Furthermore, of these ARMs, we estimate that subprime loans consist of $400 billion (78%) in ‘07 and $500 billion (73%) in ‘08.”
I recently got an update.
Click on graph for larger image.
This graph from Lacoursiere’s recent update shows that reset dates on loans spread out evenly over 2008. In his earlier report, they spiked around March of 2008 and then tapered off dramatically.
I didn’t get a chance to speak with him about the trend. My guess is that some folks were able to refinance before investors cut off credit on riskier loans. Such borrowers have pushed back judgment day to later in the year (or to other years).
However, just eyeballing the chart also suggests that perhaps there are fewer loans coming due next year. Initially, he said there were $680 billion in loans coming due but I’m guessing the number has fallen significantly. I tried to get new numbers from Lacoursiere but he’s been swamped this week. If they come later, I’ll update this post.
Click on chart for larger image.
This is the original chart back in June. The red portion of each bar represents subprime.
All this accomplished is pushing of till tomorrow, what needs to be done today. Now you just extended to correction out a few months instead of heaving it alocated to just 1H of 08. Fantastic.
Brian,
Not if inflation and incomes increase over the next few years.
Tim,
Uhhh… inflation is on the rise no doubt. Increasing incomes? Not in this country unless you are in the top 1%
One of these graphs is incorrect. No way has that much subprime been refinanced in 6 months! The original graph has been attributed to Credit-Suisse. I would like to see the sources for both of them.
I make the point yet again:
“Subprime” is a snapshot in time.
A 500 FICO can become 700 faster than you think, especially when mortgage history is added.
Brian23,
Pushing out adjustments gives people the ability to get closer to becoming a prime customer.
It does not kick the can down the road, as you suggest - at least not for all.
Seems fishy to me!
Inflation and weak dollars. High price gas and more expenses along with foreclosure. Not much of pay raise and lucky to have a job. Household income reduces. Loan resets start to kick in at rapid pace.
This whole discussion seems to assume that all ARMs that were originate during the bubble years were subprime. That’s hardly the case. Many ARMs were taken by folks with A-paper credit who would not have been able to afford the home they bought with a 30-year fixed.
I believe whatever the extent of refi’s that have occurred were for ARM products originated in 04 and early 05. I’ts the late ‘05 and ‘06 originations where the real time bombs are hidden.
Consider this:
Its commonly accepted that the vast majority of the mortgage frenzy is localized to maybe ten states, those ten states have higher than average home “values” than the other forty. So lets take a $300,000 mortgage for example at say a rate of 8.7% either on 100% 1 loan or an 80/20 combo blended to the same rate. The prepayment penalty on that mortgage would be $10,440 by the most conservative calculation and $18,000 by the most aggressive. A 2/28 has a 2 year pre-pay and a 3/27 has a 3 year prepay, it is safe to assume that most (read nearly all) people in that situation would not be refinancing before their prepay is up.
I would wager that any loans that where originated in 2004 on a 2/28 product were refinanced in 06 those that weren’t were sold for a huge profit. Any originated in 2004 with a 3/27 have a pretty good chance to be refinanced or sold, as there should still (as of now) be ample equity in the home.
As for those that say not all sub-prime loans have pre-pay’s? I say with certainty that you are wrong. All sub-prime products have pre-pay’s although the option to buy out the prepay, at a 1% increase in rate, does exist. If the borrower chooses to buy out the pre-pay the broker must forgo the $3-6000 in yield spread from the lender so I shouldn’t have to explain further why a sub-prime deal with no pre-pay is rare.
I told you all that to tell you this
· Loans written in 2005 come due this year and next, the biggest months in the year in terms of volume are always Sept, Oct, Nov.
· Loans originated those months in 05 at 100% would have to be refinanced “underwater” especially by the 1st quarter of 08.
· Loans originated in 06 where done with “value’s” that were flat (maybe slightly down) from 05 and will be “upside-down” by the end of 2008 and though 2009.
· Sub-prime product at 100% LTV offered on 2/28’s were widely available until 3/5/2007. That day is the Monday after the SEC raided Freemont Investment and Loan, Suddenly 100% sub-prime became to “risky” for Wall Street (for fear of FED reprisals) and the party was over.
Based on the date 3/5/07 and the fact that the most popular sub-prime product was the 2/28, combined with the fact that it takes at least 6 months to foreclose on a trust deed we are looking at the first quarter of 2010 as the beginning of the end of the “blood-letting”.
If the value of homes drop to 1997 levels as any research into the history of home values will confirm, that means that anyone who has purchased a home in the last 7 years will be “negative equity” by the end of the decade.
So what is the chance of recession?
And yes it is the FED’s fault.
CTAN
Here is my question that I dont understand and have not seen anything written about.
summer of 2005 - my ae told from Indy Mac told me that he recieved a corporate email stating that 45% of Indy’s production was interest only or Pay Option Arm’s and that he should push the poa’s since these were the loans wallstreet was paying the best for.
As I recall indy’s poa’s like countrywides and others readjusted at 110% of original loan amount. If broker made the 3.5% in ysp that should put the interest only payment at 6.5% to 7%. In this senerio shouldn’t the poa’s begin adjusting sooner than latter?
1. Most borrowers planned on making the minimum payment. Why would they take a 6.5% interest only when then could have gotten a interest only payment at 6% or less.
2. BIG QUESTION - WHAT HAPPENS TO THE BORROWERS SCORES WHEN THE LOAN BALANCE IS NOW 10% LARGER THAN THE HIGH CREDIT LIMIT ON THEIR CREDIT REPORT? If it was a credit card it would really hurt it.
stoptheonesidebs:The reason the borrower would take the POA at 6.5 over the 6% IO is for the option of making to “minimum negatively amortizing payment” of 1-3%, which is the only payment the borrower could ever afford. The whole Idea defies logic really.
As far as question #2 IDK I haven’t seen that one yet. Probably somewhat irrelevant as the borrower (more than likely) would be in foreclosure by then.
[...] wave will hit during the middle of 2008. A graph courtesy of Mathew Padilla at the OC Register, who obtained an updated reset chart from BofA, underscores the similar data I’ve been seeing from various investment banks recently (but [...]