Credit bureau TransUnion forecasts the ratio of consumers with mortgages that are two months or more past-due will hit 7.17% at the end of 2009, up from an expected 4.67% at the end of this year, reports the Wall Street Journal. That would be the highest level in at least 16 years.
TransUnion LLC, which analyzed about 27 million consumer records, put the blame on adjustable-rate mortgages underwritten during the housing boom. It sees low teaser rates ending and borrowers unable to afford the higher rates.
However, some key interest rates have decreased in recent weeks, so that should limit the increase in mortgage rates by holders of adjustable mortgages — a point overlooked in the short Wall Street Journal write up.
A bigger issue might be the end of delayed amortization payments on folks who got interest-only loans or option ARM loans (those allow borrowers to defer principal and partial interest payments to the future).
TransUnion sees mortgage delinquencies peaking in the first quarter of 2010.
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Those estimates also do not factor in the significant job losses which can be expected and are already in progress and will accelerate in 2009, once it is clear that the U.S. credit machine is out of gas. It should not be a surprise that after this is over, all the “records” and “benchmarks” will have been set in this time collapse. There may be one or two that remain tied to the depression, but after that, the 2007- 2010 bust will be the new standard. It is in unfortunate that people are still being encouraged to acquire more debt to “keep the economy going” not realizing they will pay the price later on.
Has Steve Thomas seen this? This may move his bottom prediction back to July!
Har-de-har-har
“TransUnion sees mortgage delinquencies peaking in the first quarter of 2010.”
The peak of Option ARM resets will occur from December 2009 through August 2010. All the fence sitters waiting to buy real estate would do well to make their move during Christmas 2010.
If homeowners know that they will be bailed out by Congress, of course delinquency will rise!! Homeowners would rather skip 2-3 payments and hope that they will get some handouts. What the government is doing is adding fuel to the fire! All we are doing is encouraging more bad behaviors.
# Liar Loan Says:
December 2nd, 2008 at 12:14 pm
“The peak of Option ARM resets will occur from December 2009 through August 2010. All the fence sitters waiting to buy real estate would do well to make their move during Christmas 2010.”
I’m thinking Christmas 2011 would be more like it. It takes nearly a year for an Option ARM reset to turn into a comp-killing REO sale, right?
Correct me if my understanding is wrong, but here’s how I see the hypothetical timetable:
–January 2011– Shockg’s option-ARM resets at 80% payment shock. He dips into savings, tightens his belt, and borrows from relatives to make Jan/Feb payments but is then out of options.
–March 2011– Shockg misses his first payment.
–June 2011– Shockg recieves his NOD (90 days, right?)
–Sept 2011– Shockg recieves his NOT (90 more days) and 30-day notice to vacate.
–Oct 2011– Bank takes possession of home.
–Nov 2011– Bank fails to sell home at auction.
–Dec 2011– Bank lists home for sale as REO.
–Jan 2011– Bank drops price of home. Home sells. Kills comps in the neighborhood.
Is my understanding of the 90-days each till NOD and NOT correct? Then another 30 days to vacate? And that is just a minimum. It might actually take longer in practice. So in theory, the soonest a foreclosure would affect the market would be like 8/9 months, but more likely about a year.
So the effects of this peak might not be felt until more like late 2011, I think.
Okay. It seems like Brain is Lee in Irvine. I can see that dysfunctional logic from miles away!! Or may be we should call it subjective logic. What you fail to understand is that your corrupt government will let people stay for half their monthly payments or even 1/4 of their monthly mortgages if they have to in order to avoid more foreclosures. You must be so gullible to think that whoever can’t pay will be foreclosed on. They will drag this thing for another five years or more if they have to for the demand to catch on !! That’s why you’re the average Joe in the street looking to buy your first home. Because you are an ignorant 2+2=4 guy. Good luck. Just get ready to bend over for the Govt to stick it to you!!! Enjoy !
# Shane Says:
December 2nd, 2008 at 9:57 pm
“What you fail to understand is that your corrupt government will let people stay for half their monthly payments or even 1/4 of their monthly mortgages if they have to in order to avoid more foreclosures.”
This is really weird…I both agree with you and disagree with you at the same time.
I agree that the corrupt government will do everything in their power to TRY and keep people in their failing mortgages.
“You must be so gullible to think that whoever can’t pay will be foreclosed on.”
Point take, but, what percentage of homes sold in O.C. are REO/short sales this last month? Wasn’t it like 45%? Foreclosures have already been happening before our eyes and in record numbers! Yes, it would be gullible for me to think that the government won’t TRY to step in and stop this. But take it one step further. CAN the government actually stop this? I think it would be gullible to think the government is anywhere near big enough to stop it. There is NOTHING even they can do to stop this.
“Because you are an ignorant 2+2=4 guy.”
Sometimes that’s exactly what I feel like.
So, what do you think of my timetable aside from the whole government interference bit?
WARNING! This will be LOOOONG!
A little primer on non-Subprime Option ARM loans and Alt-A Interest Only loans about to reset in the next couple of years:
The basics: The statistics will show that the bulk of Option ARM’s were done in 2004-2006. They would also show that most were based on the MTA index, a 12 month average of the 1 year CMT or Constant Maturing Treasury. The CMT in turn is a monthly average of the 1 year Treasury Index.
All Option ARM’s were like all ARM’s in that they were based on an adjustable Index plus a fixed margin. At most lenders, they allowed up to a 3% margin and some, like IndyMac, allowed up to 3.5%. I am not aware if there are solid stats on this but in my experience, the average margins I remember were in the 2.5% to 2.75% range though many unscrupulous LO’s obviously jacked the margin as high as they could go. Most lenders prior to 2006 only allowed a total interest deferral of 10% meaning a loan of $400,000 could negatively amortize no more than $40,000 or 10% of the orig. loan. As most of these loans started at a min. pmt of 1% (calculated as an amortized payment) and went up no more than 7.5% each year on the minimum payment only (meaning if the min. were $1,000 it could go up to no more than $1,075 the 2nd year, no more than $1,155.63 the 3rd year, $1,242.30, etc) if the borrower paid ONLY the minimum payment since 2004-’05 they…pay attention here…would have ALREADY recast their mortgage due to the max. deferred interest being reached. Therefore, these loans have already become fully amortized and the unprepared borrower who thought the min. payment was a 30-year fixed or based their personal economy on the min. monthly payment has already had “payment shock”! That leaves the 2006 MTA borrower. And for them it is a whole new world entirely…
In ‘06, most lenders bumped the maximum deferred interest to 15%. Many such as IndyMac emphasized a “fixed rate” mimimum at say, 2 or 3% reducing the deferred interest in the 1st and 2nd years. As the 1 year CMT was in the 5’s and high 4’s for all of 2006 and much of 2007, those with MTA loans from ‘06 deferred a LOT of interest. However, since Sept. of ‘07, the CMT and MTA have gone one direction: Nearly straight down! The MTA, since peaking at 5.029% in April 2007 (meaning someone with an index of 2.75% would have had a rate of 7.79%) has plummeted….as of Dec. 1st it is at 2.05% and dropping 0.20-0.25 a MONTH! Beginning at the end of this month, It WILL be in the 1’s for several months even if rates were to suddenly spike simply because it is a 12 month average…and rates are NOT going to be spiking! The 1 year CMT for November was 1.05…and the 1 year Treasury closed today at 0.77. The Option ARM is right now a “Self-modifying” loan…its rate is only going down and will stay down for a while!
What does this mean? It means a 1% MTA loan that adjusts 7.5%/yr for a $400,000 original loan amount obtained in early 2006 with a margin of 2.75% now carries a minimum payment of $1,486.78 and will adjust to a new minimum payment of 1,598.29 in early 2009. But it also means that the interest only payment (no negative amortization) is now approx. $1,730/mo. while the Principal and interest payment on it is now approx. $2,265. These numbers are based on an approx new balance of $432,000 (original loan + deferred interest or negative amortization)…however, as the MTA is headed for the mid 1’s (or lower) in 3 months when the borrowers loan adjusts to the new minimum payment of approx. $1,598.29, the interest only payment would be be approx. $1,530…which as it is BELOW the minimum payment, would no longer BE an option…in other words, even the minimum payment would no longer be a neg am payment. The actual Principal and interest payment would in this example be $2,125/mo. or $526.71 more than the non-neg am minimum payment. And again, this will go DOWN beyond even this point. It is a statistical certainty! No colossal spiking resets are in order for at least a year and quite possibly if rates were to stay at or near these lows through 2009, two. That should give lenders AND borrowers plenty of time to decide whether they want to fish or cut bait on these loans as they will STILL have “affordable” payments and do NOT face, as so many borrowers did in ‘07 and early ‘08, a DOUBLING of their mortgage payments. Sorry to disappoint!
As for Alt-A interest Only loans again lets look at 2006 since it will be the 3 year variety of these that hits the rate adjustment period soon. Most Alt-A loans were based on the 6-Month LIBOR as the index of choice as it allowed a twice-a-year adjustment period for the banks. Lets say the average margin for the Alt-A lenders was 2.75%. Last year, the 6 mo. Libor was in the mid-5’s meaning anyone (Subprime, that means YOU!) with an adjusting rate mortgage that was adjusting was at minimum, in the 8’s on their rate. Most Subprime loans jumped into the 10’s or higher…hence the “meltdown” that kicked this party off! As of now, the Alt-a loans would be in the low 5’s. So, using the $400,000 loan as the example, a 3-year I/O obtained in say Feb. 2006 at 6.5% would have generated an interest only payment of $2,166.67/mo. Now after adjusting with say a 2.5% 6 month Libor index rate plus the 2.75% margin to a fully amorized payment, their new monthly payment would be $2,311.97 ($400,000 loan at 5.25% amortized at 27 years remaining on the mortgage). That is an increase of only $145.30/mo. from the I/O payment. Not exactly bank-breaking stuff!
These examples are why I do not see any non-Subprime ARM related issues for at least 2 and probably 3 years. Folks with Treasury I/O ARM’s in adjustment will do even better. Folks’ issues these days aren’t ARM’s in adjustment nor will they be with the low rate environment we will continue to have into at LEAST 2010. The issues are household finances in adjustment! You can’t pay any kind of mortgage if you don’t have a job or if you have had your income cut. That is what will drive the foreclosure market going forward. The Subprime loans have been mostly washed from the system….only the REO properties from them remain! Same with most of the speculator/no-doc-no-money-down crowd! Unsold REO inventory creates a drag on home values but will be a pittance compared to potential foreclosures from job losses. Now, it’s only about your job, your income, or lack thereof! ARM’s are practically a non-issue and won’t be until 2011 imo when talk will turn to inflation…until then its ALL about the jobs!
To Brain
So according to Larry, you should revise your dates big time. And by then the demand and the hyper-inflation from all this money printing will raise the prices to the levels that takes care of those potential foreclosures!! People will have to move to hard assets very soon to protect their cash from inflation in about a year from now. Just keep waiting !!!
Larry,
I appreciate your analysis and your numbers can’t be argued with. In my experience, borrowers are less affected by rate swings, then by IO loans resetting to full amortization. The majority of subprime borrowers that faced huge payment shock were IO borrowers. They faced the double whammy of beginning a principal payment AND a shorter amortization term (usually 27 years instead of 30 for a standard loan).
I look at your numbers as a best case scenario that would prevent things from getting too bad. But if rates should unexpectedly rise, then all bets are off. If your predictions hold true, we should still see a small spike in prime/Alt-A borrowers defaulting and being foreclosed on during the peak Alt-A resets (Dec 2009 - Aug 2010). This will put tremendous downward pressure on home values, expecially in the upper middle class neighborhoods that until now haven’t been hit as hard. Once the high end neighborhoods take a hit, it will compress the lower end neighborhoods even further.
I believe your prediction of low rates for the next two years is a likely scenario, which is why I think the winter 2010/2011 window will be a good time for those wanting to jump in. It will be the ideal combination of low rates and depressed home values!! I like winter because it’s the low demand time of year for housing, which increases buyer’s negotiating power.
After that, the economy will be nearing the end of this recession and that will put upward pressure on rates, especially as (hyper)inflation becomes a real threat.
Special note to Mathew Padilla: You might want to look at buying at this time and then, like Lansner, you’ll become a fan of the homeowner’s deduction.
when a $700K at peak house is selling for low $300Ks…
… i guess we might see some inflation…
but at that point it won’t really matter
the global economy will have already been flushed away
along with all the bubble debt, i mean paper wealth
deflation,
ask japan,
not easy to turn off when it gets going
Larry P.
Thanks for the informative post! You obviously know your stuff. I have a couple of comments about some of the conclusions you came to.
About option arms, you said: “Therefore, these loans have already become fully amortized and the unprepared borrower who thought the min. payment was a 30-year fixed or based their personal economy on the min. monthly payment has already had “payment shock”!”
As you stated, this is only true for those people who always chose to make the minimum payment. I’ve read stats that 80% of option ARMers have at some point made the minimum payment. This doesn’t mean they always did, merely that they at least did once. I don’t have stats on how many people only made the min payment but I think you’re right in that those (especially the older vintage) have already recast due to hitting the max allowable loan balance.
I don’t think all of them did this though, or even most of them. I think most of them paid on average somewhere inbetween the min payments and the fully-am. Here are a couple sources that lead me to believe this:
(1) http://llinlithgow.com/bizzX/Charts/ARMResets.jpg. (source: Barclay’s) There are still tens of billions of option arms due to reset each quarter, with a median payment shock of 30-80% based on the year it resets. You’re right that the typical payment won’t double, but I disagree that people are going to be fine with a 50% increase in their mortgage payment. The whole reason for the option ARM was to get people into homes they couldn’t afford with a 30-year fixed. How are these same people going to be OK with their new 25-year fixed (with is how long they have left to pay in full if the loan resets after 5 years) on a potentially higher balance?
(2) http://us.news2.yimg.com/us.yimg.com/p/fi/16/85/06.jpg (source: BusinessWeek). The resets ARE happening earlier just like you say. But they aren’t happening even close to being finished. They are actually just beginning. The curve has shifted, not disappeared.
….”the beatings will continue, until morale improves”.
Part of these delinquencies can, indeed, be blamed upon the federal government and their newly sanctioned SMP (Streamlined Modification Process) which mandates that lenders work with homeowners who are severely delinquent - having missed at least three payments. I should point out that once you’ve missed three payments, you are dangerously close to having a Notice of Default filed against your property - the first big step in the foreclosure process. And then the lender will attempt to adjust your payment to no more than 38% of your gross income. They fail to mention that the modification process can often extend up to an additional 90-120 days.
For those who have been treading water, borrowing from Peter to pay Paul, and living off of credit cards hoping for that light at the end of the tunnel to magically appear, there is another option. A good loan modification company (note “GOOD” not “any”) will be able to take a non-delinquent homeowner who is just inches from delinquency and get their loan modified to an acceptable and affordable permanent solution within 45-60 days - and that is WITHOUT being three months behind in your payments! If you’re on the edge, do some homework and find a reputable and legally-operating loan modification company. It will be worth it in the end - and your credit will stay intact.
OC home prices are going to fall off a cliff in 2009, as you will see pricing that existed from 1996-99. Home prices over the past 6-8 years were a direct result of low rates and non-existent lending standards, nothing else. Now that the house of cards has been exposed, you can expect a very long term downward spiral in prices that will decimate the real estate market. The housing market will fall even further when Arnie lays down his new California tax hikes, driving business out of the state, not to mention average employees.
Shane,
Is that you, formerly of Ameriquest? We just want you to know how much we enjoyed your trip to Tulsa. You sure helped out at least one mortgage holder here!
Thanks again.
I’m late to the thread, but I did want to chime in.
I own a condo, purchased in 2004 using a 5/1 Option ARM. For the last four years, I’ve been treating it as if it were a 30-yr amortizing loan. So I want to rebut the notion that only people who couldn’t afford real mortgages took out these loans. We took the loan because we lacked an established credit history, despite both possessing well-paying jobs, and being able to make a full 20% downpayment. No one cared about the details of our financial situation - they just fed us into the model, and told us they couldn’t make a regular loan, even with a co-signer. That was part of the beauty of computer-based lending.
I also want to point out that lenders did everything in their power to encourage borrowers not to repay these loans responsibly. I think that often gets lost in the conversation. The lenders really wanted us to pay just the interest, so that they could make more money off the loan in the end.
I went through three months of correspondence with my (now defunct) lender, trying to set up regular monthly deductions from my bank account. The lender was willing to deduct the interest each month. I could even automatically deduct the same amount each month for the principal - say, $400. But an amortizing loan requires making a slightly larger principal payment each month. That’s the whole point. And - I kid you not - I was informed that their computer system couldn’t handle that. So we set up a spreadsheet, and we write our monthly check out by hand, and mail it in.
It would be so, so easy to require lenders to take some basic steps to prevent future problems. Every month, they send us a statement. It tells me how much I owe in interest. What if the lender also had to provide the amount I should pay that month in principal, if the loan were to be repaid in thirty years? Lots of Americans aren’t capable of making that calculation on their own. Seeing the number every month would be, at the very least, a sobering reminder of their looming obligations. And it might inspire a few more of them to actually make a payment on the principal.
I am so glad I found this thread and hope you would be able to give me some advice. This is our scenario: We bought our townhouse in Irvine in 2004. We paid $537,000 (just before it spiked again)and put 20 precent down with a 5/1 arm. Our mortgage is $430000. At some point our home was worth about $750,000 and we thought we maid an excellent investment as did many others. We have only been making the interest payments of 1488 (we got a great rate then). Our 5 years are going to expire in April. WE are in a process of trying to refi into a 30 year fixed while the prices are still (and barely) allowing us to do so. However… from everything I read as far as predictions go, we are looking at a minimum of additional %15-%20 price reduction in real estate. So, in a hurry we will find ourselves sitting on a $430000 liability to the bank while the actual value of our house is way lower. The question is - should we just try and get out now while we could still get between $525,000 to $535, 000? ( after the realtor’s fees we are hoping to recover about $70000 from our $107,000 payment).
Then may be wait it out until 2010 and buy again. However, may we then find ourselves in a situation that we won’t be able to get a mortgage because the guidelines are going to be so much stricter? I am so confused as well as scared. On one hand I don’t want to move to a rental place and loose my home with it’s tax deductions but on the other, I don’t want to owe my life to the bank with the $430000 that we currently owe them.
Please please please tell me what you think. ALso, is there anyone you could recommend I spoke with about all this. I would love to find someone who has no vested interest to our situation (i.e. not a mortgage broker or a real estate agent) who could give me his objective opinion.
Thank you all so much in advance