Is there a simple answer to the coming wave of Alt-A and Option ARM resets?

Story: ...Why don't the powers that be, the wizards behind the screen, waive these resets?  For that matter, why don't they lower rates across the board at least temporarily so as to reduce payments for everyone.  I know about securitization and all of the nameless and faceless investors that supposedly won't allow this to happen.  But wouldn't they rather be collecting 4 percent on their investment rather than not collecting 9 percent?

http://www.mortgagenewsdaily.com/02112009_Alt_A_Resets.asp

Sounds like an opportunity to us.  We should be activly looking to refinance these people.

Simplicity is not in any BIG time investors vocabulary because they are out of scope with the every day Joe and Mary.  They will find ways for the losses to benefit them, whereas Joe and Mary struggle with the everyday needs of life.

Lower rates across the board, waive the reset, waive the prepay that is attached to most of these securities just to name a few.  With that said value is the driving force behind weather a refinance works or not.  McCain had it right, we need to refinance these people into more stable securities (loans) no matteer what the value is.  A loss needs be taken by the BIG guys out there but only to the tune of current value.  Example, house valued @ 250K but borrower owes 280K.  Work a stable program (30 year fixed) and set the new mortgage @ 97% or 95% of that number and refinance them.  A small loss is incurred but the note is not foreclosed upon and made affordable whereas there is a good prospect that future payments will be made.  The loss id 30K versus 280K and the market will be foreced to find a floor.

Just some thoughts from an everyday Joe and Mary.

The reason the resets will not be waived, is because it would hurt the bond holders as well as the potential future sale of bonds.

The bond market has more influence than any other market segment, and the market will do as the bond holders wish.  It is that simple.

They do not collect the interest rate on the loan, but rather the spread between the cost of money and the rate.  This makes 4% a loss in the future.

Also, if the loans are reworked, the bond holders can then force a repurchase of thier investment from the seller.  They would do this rather than keep the bond, which would cause even more hell to break loose.

C'mon Jeff.  Really?  John McCain has the answers?

And who should hold these loans which are written well below the LTV of the home?  The taxpayer?  Also, this is not a small loss.

Let's be honest.  Joe and Mary can't afford the home, most likely never could, and therefore should not be living there.  They should leave the home and rent until they get their credit back in shape.

Here is a real idea for you.  Have FHA reduce the guideline for the amount of time that needs to elapse before borrowers qualify for a home loan to 0 months.  Allow bankruptcy judges to dismiss the home loan, as well as the credit cards Joe and Mary ran up to afford their ponzi lifestyle, and include a recomendation for how much home FHA should allow them to buy with their newly cleaned debt to income ratio after the BK.

America is not about avoiding failure, but rather admitting failure and making a comeback.  Lets do things the proper way.

He didn't say McCain has the answers, he said McCain had an answer (or at least saw the problem). Value is the driving force for most of my declines.  If fannie & freddie allowed for streamlines with no appraisal like VA it would be a huge relief for many homeowners and they might not feel like because they are doing the right thing no one is helping them.

The current policies to do nothing but bailout people who shouldn't have been in homes to begin with and leave the 95% paying their mortgages on-time out to dry. If you want to stabalize the economy you help those who do the right things.  If you think of it like VA and FHA does that they are on the hook anyway, why not help them lower the payments and thus lower the default chances for the future.  And maybe with that extra money they start going out to eat and pick up a new car.

As long as we reward bad behaviors (banks, borrowers, employers, businesses, etc) we're going to keep getting bad behaviors.  I agree America is not about avoiding failure, failure teaches lessons (unless your congress) and builds us stronger.  Now only if government would get the heck out of the way.

John,

Thanks for the comments.  I apologize for not clearly clarifying myself, certainly John McShame does not have most any answers.  I was indicating he is right in one point only, the fix to the economic issues is in the housing mess, it got us into it and I believe it will get us out.  That was the one thing I agreed with him on is borrowers who cannot refinance and don't have the equity to take advantage of lower rates.

I don't know what your data base looks like but I have run into 60% of my clients who can afford their home, would have qualified any day of the week, but are stuck.  They are certainly not Madoff's and are full doc borrowers.  Believe it or not they are out there.

Our beloved new administration is throwing money around hand over fist that has nothing to do with this crisis and all the republicrats are letting it happen.  They should cut out all the crap in their joke of a stimulus plan and put the money to good use. 

I love your last line because it is very accurate, capitalistic way of looking at things.  It should be applied to the banks and wall street as well.  My kids $$ should not be financing the mess that greedy investment bankers were allowed to start.  Let em fail, and pick up the pieces and move on.  I do however think it is a lot more complicated than that and right now everyone is throwing darts at a wall and hoping they stick.

Just wait for rounds two and three.  The ALT A's and OPTION ARMS are the second round and not far behind will be the commercial crisis.  Can't wait!

Guideline changes should be a by product of any solution.

HAve a great night!

Jeff

Amen Clem!

I remember when Fannie and Freddie had their streamlines functioning well.  I did as many of those than I did FHA or VA.

Jeff

Maybe, I am dreaming, but surely, allowing streamline refinancing just as FHA does sounds like a great solution to me!  Even those who do qualify for a lower fixed rate can't because of low values, for example.  So forget about the values, streamline those who qualify and put more money in their pockets which ultimately could help the overall economy!  Seems that simple to me!

Of course we all know that any common sense answers discussed on this blog will never happen.  Our leaders (donkey or elephant) are so out of touch with the people and the problems that we'll never get an easy answer.

So for future discussions we need to have answers that cost at least 10 to 1. Example I have a flat tire, answer buy a new car, then take one of the tires off that car and put on your old car. Then discard new car.

Sorry, someone in my office pointed out I forgot something. Form a comittee first to study the problem.

Jeffrey Larson:

Our beloved new administration is throwing money around hand over fist that has nothing to do with this crisis and all the republicrats are letting it happen. 

Ummm... no Republicans in the House voted for the Stimulus Bill and only 3 moderate Republicans voted for it in the Senate.  I don't know how much more they could do.

Jeffrey Larson:

They should cut out all the crap in their joke of a stimulus plan and put the money to good use. 

There is more pork here than you'd find on a pig farm.

They should put a lot of pressure on the three that voted for it to make it pass.  Spector got some promises he won't be challenged in his district this upcoming election.  your right Ken, there wasn't a lot they could do, but there is a lot we can do.  Last time I read the constitution, it read "we the people" not we the GOVT.  these guys are rookies making rookie mistakes but have power in both branches.  Bad, Bad cocktail.  The election could have been won if the Repubs played their cards right but it was the big lay down.

PRAYER is the only answer!

JL

Jeffrey Larson:

PRAYER is the only answer!

JL

AMEN BROTHER...... I also believe in America and our ability to make the grass green on both sides of the fence. We the people lead by a few will make a difference. Fight the good fight.

"We the people" only makes a difference if enough people actually understand the problems and the effects of any legislation would have.  Congress will not give "the people" enough time to get an understanding and the bill will be passed before the masses have any idea of how it works.  All most people will know is thet there is a "stimulus package" being voted on. 

In my 10 years in the business, I've originated only one option ARM -- and then only because the borrower insisted on it.  I can't say that I had much use for World Savings either.... people I knew who sent them business said they were a pain to work with..... so, I definitely wouldn't consider myself an option-arm apologist.

That being said, in reading all of the stories and seeing the recent coverage regarding these loans, it's interesting to note that no one has mentioned that the indices that these loans are tied to are at ridiculously low levels right now.  The 1-year CMT is at .54%..... How many people who used this loan responsibly --as opposed to using it as a vehicle to fund champagne tastes on a beer budget-- do you suppose are doing cartwheels right now? 

An interesting tidbit for my fellow brokers:  it's not something I like to admit, but.... I did do a stint (very short) working for a national lender in a call center.  Some of the calls we got consisted of portfolio defense overflow.  During that time, I can honestly say that every single request to refinance an option arm came from borrowers whose loans were originated on a stated-income basis.  Looking at the 1003's from the original application, you'd have to be a complete moron if you didn't notice that these loans were as fraudulent as a forged pay-stub. 

Now for the good part:  of those patently fraudulent loans, a good 75% to 80% of them didn't come from wholesale.  Nope, hardly any of them came from brokers.  "Who then?" you ask.  The majority of the sludge & slime came through the correspondent channel -- the guys who like to brag about "in-house underwriting" and their ability to deliver checks to the closing table. 

In partial defense of World Savings, even though their product provided for up to 125% neg-am over a 10 year period, at least their payment factor (I remember it being somewhere in the neighborhood of 4%) wasn't so ridiculously low (I also remember seeing a few rate sheets with payment factors below 1%) that you'd hit the 115% level within a couple of years of the loan's origination.

Along different lines, now that the option arms are gone the way of the dodo bird, I wonder what's become of the "mortgage planner" paradigm which so enthusiastically encouraged the use of this product?

Juan Boldizsar:

Now for the good part:  of those patently fraudulent loans, a good 75% to 80% of them didn't come from wholesale.  Nope, hardly any of them came from brokers.  "Who then?" you ask.  The majority of the sludge & slime came through the correspondent channel -- the guys who like to brag about "in-house underwriting" and their ability to deliver checks to the closing table. 

Amen Brother! I have a client (investor) who used an option ARM on his investment properties and he's really enjoying his current 3.50% interest only payments on his rental properties.

Great point Juan, i was wondering if anyone would point out how low the interest rate is on option arms right now.  Option arms are not bad loans, the improper use of an option arm makes it a bad loan. 

Victor Burek:

Option arms are not bad loans, the improper use of an option arm makes it a bad loan. 

I don't think I have seen a product in the industry that doesn't have its proper place.  With all the tools available, all we have to do is pick the right one.