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Default Of Mortgage Loans: Alt A And Option Arms Are Next
By David Spurr on February 9, 2009 | More Posts By David Spurr | Author's Website
This chart shows why we are not yet out of the mortgage mess. This is the reset schedule on Alt A and Option Arm Mortages. There is going to be another wave, similar to what we’ve already experienced. The fear is that the default rates on the Option Arms could be real bad along with the Alt A defaults. We’ve been hit already, but brace yourself as round two approaches.
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There is more to come, but from a different source. It seems that small business owners used their homes to access equity using ALT-A, Option ARMs, Interest-Only, etc. mortgages.. the co-called “Toxic” mortgages. According to a National Association for the Self-Employed(NASE) survey which I authored and NASE ran to its national membership, there are 3.7 million small business owners who have these mortgages that are going to “Reset” in 2009-2012. Of this amount 3 Million are “Very Worried” about their ability to afford the monthlyu payment after “reset”. Most shocking is the fact that 1.3 Million were already from 1-3 months delinquent, and thsi is even before reset.
Here lies is the problem. Since these small business owners employ from 1-10 people, we are flirting with disaster as the suffer the loss of their homes, which may precipitate their businesses to fail. The result will not only be foreclosure, but JOB LOSS as well. Our economy can ill afford an increase of millions of unemployed as these small businesses fail.
Congress is unaware that small business holds the key to a solution to this crisis. As Congress seeks to add millions of jobs to our economy…Job retention is as important as job creation.
bornsteinsong@aol.com
Good afternoon Professor Bornstein,
Thanks for your info! What would be the best way to profit from these eventual defaults? Would it be to short the banks that own this debt? Any advice would be appreciated,
Federico
rberloni@yahoo.ca
The potential negative effects of ARM resets may be significantly reduced if mortgage rates continue to remain low.
Normally, one would agree that low interest rates will save mortgages at reset. This situation is very different. 80-90% of the Option ARMs are “underwater” ( Principal balance is far above the Fair Market Value). In fact, the tempting part of Option ARMS is that you had the coiec to pay the “minimum” paymwent which in many cases was so small that the Principal increased rather than decreased. This is similar to paying the “minimum” on Credit Cards.
Therefore, although the intersst rate may be lessened, the Principal is the culprit. At reset, the Borrower will be required to pay the Principle over the remaining term of the loan and even a low interest rate will not save him from a spike in the monthly payment. That is why Congress is considering Principal Cramdown..but that approach is unpopular and fraught with danger.