By Steven J. Williams, CyclePro | May 2010
The next 2 charts show the residential mortgage rate reset and recast schedule. The top chart is the combination of all mortgage loan types. The gray bars in the background are what the forward reset schedule looked like as of last September. The blue bars are what the schedule looks like now. The bottom chart is the combined Alt-A and Option ARM loans.
Click Here, or on the image, to see a larger, undistorted image.
Click Here, or on the image, to see a larger, undistorted image.
What I find quite incredible is that the loan modification program has done nothing to change the outlook of defaults caused by rates resetting higher. All it has done is push the damage out somewhat further, to another timeframe. The new reset peak has moved out by several months to around December, 2011. The 'reset' bubble really does not end until about September, 2012. If the normal foreclosure process takes about 6 months, then expect the foreclosure bubble to push out to at least Q1'2013.
The Alt-A, Option ARM chart shows that the value height of these loan types have reduced slightly, but their reset schedules were pushed further out. The combination chart shows that the value of all loans has actually increased. The area under the bars adds up to $1.13T which is an increase of $261B versus the same timeframe from the 2009 report.
We had been told that hundreds of thousands of residential mortgage had been 'renegotiated' to terms that help keep the home buyer in their home. But what these charts are telling me is that that effort has been little more than smoke and mirrors. The likely damage caused by reset-induced defaults has not only been pushed further out in time, the size of that bubble has grown larger.
The most vulnerable of mortgage types are the Alt-A and Option ARM's. The area under the bars for the 3 years charted represents $435B for these two loan types. My biggest mortgage fear is that this reset bubble will continue to be pushed further and further out. So any forecasting we try to do from these charts is likely to shift as well. The reason I fear this scenario is because at some point this bubble must burst. And when it does, it could cause vastly more damage than if it were eased out now.
Another twist to this crisis is the fact that a significant number of Small Business Owners fell prey to the attractive Alt-A and Option ARMs loans that were used to refinance their homes to access cash for their businesses in the built-up equity in their home during the Housing Bubble. They are at-rsik as these mortgages reset/recast since the most attractive, Interest-Only, comprise more than 93% of the these Option Arms. I have three Bornstein & Song Toxic Mortgage Surveys to provide evidence for thsi conclusion. The financial distress, as negative amortization will cause a significant spike in their monthly mortgage payment, will result in further job losses and more defaults and foreclosures. This will prompt a self-perpetuating cycle of job loss and foreclosures.
ReplyDeleteSamuel D. Bornstein
Professor of Accounting and Taxation
Kean University, School of Business, Union, NJ
bornsteinsong@aol.com