Thursday, June 11, 2009

Option ARM Reset Wave Threatens Housing Rebound

A Bloomberg exclusive.

Some highlights (lowlights?) below. Whitney Tilson's ubiquitous mortgage presentation cited.

What's crazy is the talk about a 73 year old lady, Shirley Breitmaier, who's mortgage payment is skyrocketing from $98/month (which I'm sure was the minimum allowable payment) to $3,500. That's in paragraph one. About half way into the story we find out her mortgage was a $313,000 loan.

So, $98 was insanely low and she was/is clearly neg am'ing massively ($98/month actually equates to 3/8s of 1% annually!). Her loan is particularly lax as it allows her to neg am to 145% (so nearly $450,000) of the original loan balance though most Option ARMs cap that amount at 115-120% of the initial balance. Also, her loan was a re-fi as she's lived in the house for decades, which makes it a sad human story (hopefully she had fun with all the money).

People often get very angry at the lender in these cases, but forget that the borrower in a re-fi got a huge amount of cash and chose to do something with that money. I have sympathy, but it's limited by this fact.

The rational outcome for all sides is for her to deed the house back to the mortgage holder now and let them deal with the problem before housing values plummet further in exchange for them not crushing her credit standing:

June 11 (Bloomberg) -- Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. [does anyone else find the name of this town ironic? - TILB] The 73-year-old widow may see it jump to $3,500 a month in two years.

Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Maryland. California accounted for 58 percent of option ARMs, according to a report by T2 Partners LLC, citing data from Amherst Securities and Loan Performance.


Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.


Breitmaier, who has been in the home for 45 years and lives with her daughter, now fears she will lose the off-white stucco house that’s a hub for her family.

I wish the government would bail us out like the banks and the car businesses,”[emphasis added by TILB - and out politicians wonder why people hate them] she said. “I’d like to go from here to the grave next to my husband.”


“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” Pannabecker said. “The consumer had a product pushed on them that they had no hope of understanding.”


“The problem is, real estate values went down,” Paul said. [not the shit-poor underwriting standards, of course - TILB]

Option ARMs typically recast after five years and the lower payments can end before that time if the loan balance increases to 110 percent or 125 percent of the original mortgage, according to a Federal Reserve brochure on its Web site.


Refinancing is impossible in many states given the nationwide drop in prices. In California, the median existing single-family home price dropped 37 percent in April to $256,700 from a year earlier, according to the state Association of Realtors.


The delinquency rate for payment-option ARMs originated in 2006 and bundled into securities is soaring, according to a May 5 report from Deutsche Bank AG. Over the past year, payments 60 days late or more on option ARMs originated in 2006 have almost doubled to 42.44 percent from 23.26 percent, Deutsche Bank said. For 2007 loans, the rate has climbed from 10.1 percent to 35.25 percent. [emphasis added]


“There’s a level of hopelessness to the phone calls now,” said Brown [a borrower advocate].

Anyway, great article. Bloomberg's been on this story as well as anyone, so kudos to them.

Happy green shoots!


Let us know what you think about the debacle in housing!