Okay, mangled puns at 7:00 a.m. aren’t funny, but neither is this guy’s prediction that there’s a wave of option ARM mortgages set to implode in the next couple of years that will make the recent mortgage fun look like, well, fun.
Essentially, by giving money to the banks, the Fed has postponed the resetting of these loans to catastrophic levels (one such loan I’m aware of dropped nicely this year, with the result that the borrower is paying $2,000 less per month. Of course, it resets every year so ….).
Read the whole article for an explanation in clear language of what these things are. Here’s the conclusion:
When the lender implosion began in Aug 07, those of us in California, Florida, Arizona and Nevada already knew what the rest of the nation would soon find out. Foreclosure activity was increasing, property values were falling, and the economy was stalling out. The Fed knew this and so did those who were buying the One Year Treasury Bonds and Notes, and as a result, the Bonds and Notes were increasing in value and dropping in rates.
By Jan 08, the Federal Reserve knew the market was in freefall. They Fed knew that the Foreclosure Crisis would only worsen. They also knew that the Sub-Prime Crisis would worsen, and then later would come the Option ARM and Alt-A Crisis. The first objective would be to attempt to deal with the Sub-Prime Crisis. Their actions drove the LIBOR Index down to .31% by the beginning of 2009. Unfortunately, that was too late for most Sub-Prime borrowers. They had originated loans from 2003 to 2006, usually fixed for two years, and by the time LIBOR rates fell to a “reasonable” level that would prevent foreclosures, it was too late. The majority of the loans had recast and people had given in to being foreclosed upon.
While the Fed was dealing with the Sub-Prime Crisis, they were also hoping that their actions would prevent the Option ARM Crisis. By lowering the MTA Index, it would postpone the recasting of the Option ARM loan to the full 5 year term. Within that time, the hope was that the “lending crisis” would end. Of course, once again, the Fed was out of touch with reality.
What the Fed failed to realize, or did not care about, was that homes were completely overvalued. As foreclosures continued to occur with the Sub-Prime Crisis, home values continued to fall. Even more short sighted, the reaction of the Servicers was not considered. The Servicers had no concern for the homeowner. Instead, they mostly wanted to foreclose (as I have detailed in previous articles).
The one action that the Fed has accomplished is to postpone the Option ARM implosion. By decreasing the MTA and other indexes, they managed to extend the period of time for when the Option ARM would recast. Now, most Option ARM loans will recast in 4-5 years. Since 2005 and 2006 saw the bulk of the Option ARM loans originated, the implosion will really occur during the next two years.