12/17/09 Baltimore, Maryland – The second wave of ARM resets and foreclosures might come sooner than you think. According to Whitney Tilson and Glenn Tongue of T2 Partners, the experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.
And that could be happening very soon:
The chart above, which should look familiar, shows the two peaks in this long-term housing conundrum. The first mountain is comprised of subprime ARM resets. And the second is mostly constructed of option ARM resets. We appear to be in the eye of the storm.
That alone shook our nerves when we first discovered it. But it was a different chart in Tilson and Tongue’s most recent presentation that really got us startled… It’s also the reason I’m predicting the dollar spike in 2010.
Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.
That means they are resetting early…like right now — with unemployment reaching quarter-century highs every month, and a massive number of homeowners about to receive mortgage bills for two-three times what they are used to paying.
It takes anywhere between three-12 months for most homes to actually go into foreclosure. It’s tough to say exactly when the storm will come. But my guess is the second half of 2010.
Jim Nelson
Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.
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great work
most impressive
I’m linking this at Calculated Risk, sil vous plait
One thing different about this wave is that there are probably a few “Bernankes” out there, who can afford the recast. I dont know for sure that his was an option arm, but I think it might have been. Anyway, some of the more sophisticated folks just took the teaser rate while they could, fully expecting they would one day have to pay principal. How many? Dont know? But Id think more than there were in percentage terms for subprime. So you may get a lower default rate, and you may not get as many foreclosures, but even for those who dont default, this sucks money out of their pockets that might have been considered discretionary, so it will still prove immensely painful to the CA budget, seeing as about 50+% of these timebombs are planted there.
the second wave is already ashore
9.8mh expression
the final wave is already ashore
If an ARM “explodes,” the principal goes up and therefore the payments go up, but haven’t interest rates been going down? Wouldn’t that offset some of the increase in the principal portion of the monthly payment?
> I’m predicting the dollar spike in 2010
Can you explain this prediction, please?