Walkaways, Pay Option ARMS Hit Banks Bad


A lot of reports out today collectively gave me a very bad feeling about the state of our current housing recovery.

First, Amherst Securities Group took a look at Pay Option ARMs. These are the adjustable rate loans so popular in 2006 that allowed you to choose your monthly mortgage payment, while tacking what you don't spend on to the principal of your loan. Only 9 percent of these loans had full documentation from the borrower and 76 percent were originated in California, Florida, Arizona and Nevada, our four disaster states for housing. It should therefore come as no shock that they are suddenly approaching subprime in their delinquency status. So while we all sit around saying that the subprime loans have already worked their way through the system, they're fast being replaced by POA's. "For 2006 securitized issuance, 61% of subprime loans have defaulted, as have 49% of the option ARMs," according to the Amherst report.

Not soon after I saw that report, another flew into my "In" box from Fitch ratings: "Overall, prime RMBS 60+ days delinquencies rose to 9.2% for December 2009, up almost three times compared to the same period last year (3.2% in December 2008). The 2006/2007 vintages combined rose to 12.7% from 4.3%." They're talking about residential mortgage backed securities, which of course are pools of residential loans.

Then there was the report I received last night from Lender Processing Services:

"Total delinquencies, excluding foreclosures, increased to a record high 9.97 percent, representing a month-over-month increase of 5.46 percent and a year-over-year increase of 21.29 percent. Loans rolling to a more delinquent status totaled 5.01 percent compared to 1.52 percent of loans that improved. Of loans that were current in December 2008, 4.37 percent were either 60 or more days delinquent or in foreclosure by the end of November 2009, a rate higher than any other year for the same period."

So instead of diving into a bottle of Ketel One, I jumped on a conference call with the Mortgage Bankers Association that included their chief economist Jay Brinkmann's economic forecast. Brinkmann spoke quite a bit about unemployment, noting that while the rate of job losses is definitely slowing, the already-unemployed are not getting back into the job market at a healthy rate. He noted specifically that this would mean many more prime loan defaults by borrowers in financial trouble as opposed to borrowers who took out loans they never should have been offered.

"Over one-third of prime jumbo borrowers that are current on their mortgages also are ‘underwater’ on their mortgages," said Vincent Barberio of Fitch. Makes you wonder how long they'll stay current.

All of this then piled on top of a number I noted yesterday, not newly reported, but new to me, that Experian was forecasting close to a million borrowers who could afford to pay their loans had voluntarily walked away from their commitments because they were so far underwater that they would not see any home equity any time soon. Judging by the fact that a quarter of all borrowers, or about 15 million, are currently underwater, that number will likely rise in 2010.

Needless to say, the big banks, while perhaps trying their darndest to modify as many loans as they can, are looking at potentially millions of borrowers who either can't be modified due to insufficient income or don't want to be modified due to insufficient interest in throwing their money into a bottomless pit.

Just some things that crossed my path today.

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