Don't Fear the Resets

[rose-colored-coolaid]

[sniglet]

[deejayoh]

lol! I just pointed out the same article to housing bull mdyquin over on the blog. He was maintaining most of the resets were behind us. Unfortunately, 2X defaults on slightly less volume still equals increasing foreclosures!

Math is a dirty mistress.

[jillayne]

OMG.
Well then we are in for some very serious defaults. We need to go get the Christopher Cagan/Firstam Core Logic report from 2006 or early 2007. I will go find it.

[jillayne]

I remember when this report came out last spring. Everyone thought Cagan was being way too heavy handed with his foreclosure predictions. Now it would seem as though he was too generous.

http://www.csupomona.edu/~rerc/RERCSC%2 ... .30.07.pdf

He didn't factor in the large price declines seen in bubble cities and he didn't factor in the credit crunch, and the psychology behind the jinglemail decision.

[faster]

Needs more cowbell.

[jillayne]

I got a fever and the only prescription is more cowbell.

[Matthew]

This is my favorite topic, ARM resets.

Here are a few of my favorite charts:

http://www.financialsense.com/fsu/edito ... 703.h2.jpg

http://www.generationaldynamics.com/ww2 ... gchart.gif

http://msnbcmedia.msn.com/i/msnbc/Compo ... Chart3.gif

http://mortgage.freedomblogging.com/fil ... -chart.jpg


Those option ARM reset coming in 2010-2011 are nuclear bombs waiting to go off....


Tick, tick, tick ,tick.....

[Alan]

Payment time has come
Here but now we're gone
The seasons don't fear the resets
Nor do the wind, the sun or the rain
we can be like they are

Come on baby... Don't fear the resets
Baby take my hand... Don't fear the resets
We'll be able to walk... Don't fear the resets
Baby I'm your man...

Lenders say they're done
Here but now they're gone
Romeo and Juliet
Are together in eternity...
Romeo and Juliet

40,000 men and women everyday... Like Romeo and Juliet
40,000 men and women everyday... Redefine happiness
Another 40,000 come everyday...We can be like they are

Come on baby... Don't fear the resets
Baby take my hand... Don't fear the resets
We'll be able to walk... Don't fear the resets
Jingle mail's our plan...

Love of two is one
Here but now they're gone
Came the last night of sadness
And it was clear payment couldn't go on
The door was open and the wind appeared
Copper was stripped and then disappeared
Curtains flew and then he appeared
Saying don't be afraid

Come on baby... and we had no fear
And we ran to him... Then we started to fly
we looked backward and said goodbye
We had become like they are
We had taken his hand
We had become like they are

Come on baby...don't fear the resets
Dont fear the resets
We have become like they are
Like romeo and juliet

[jillayne]

La, la, la, la, la


Matthew, maybe a wave will be defaulting way before 2010, 2011.

I am no economist, but it would be interesting to try and predict early defaults on these. We could use Cagan's model and add in the psychological factors of the youwalkaway phenom, a continuing credit crunch, tightening of underwriting guidelines, an INCREASE in interest rates that is likely headed our way, and the recession that is now here.

Early payment defaults on all these will rise. But by how much?

There are some other unknown factors: An Obama election that provides as socialist solution for all these defaulting homeowners, actually, Hillary would probably do the same thing, and we must also not discount a new problem I see headed our way: Massive failure on the loan servicing level to keep up with all the defaulting homeowners.

The loan servicers are not staffed, trained and ready to handle the demand. I wonder what the servicer's capital base looks like? Do they have the money to pay for increased staff and all the increased expenses? If not, they will have to raise their fees on the banks.

[rose-colored-coolaid]

[deejayoh]

[mike2]

What I find truly amazing is that defaults on prime loans issued in 2007 are actually higher than subprime loans issued in 2005 when tracking the # of months to 60+ days late.

Prime isn't as prime as it used to be.

[Lake Hills Renter]

[jillayne]

Hi Mike,

In regards to higher defaults on the 2007 prime loans, we can go back to the basics. The top two reasons why people default on their loans are:

Divorce and failure of a business.

There are other reasons such as job loss and medical problems but those are the top two.

The top two reasons why people divorce are:

sex and money.

It would be interesting to track divorce statistics in areas of high default and cross reference that with economic downturn data for the same geographical area, along with small business failures. Just for fun of course, we would also need to look into the sex part. Maybe I should become a sociologist.

But I digress. If traditional reasons such as divorce and business failure were not on the rise, I would want to look at other sociological factors at play in the mortgage market. We were still hearing "buy now or be priced out forever" during the first quarter of 2007 from Realtors (LOL, we're still hearing that now.)

Also, the mortgage market started to experience some anxiety during the first part of 2007. This could have prompted mortgage brokers and banks to actually become more desperate in making as many loans as possible in order to make their quotas. Underwriting guidelines didn't REALLY start to tighten until the Fall of 2007. I am not surprised with the 2007 prime defaults.

I would like to predict right now that the 2008 vintage (prime) loans will also contain a higher than average number of defaults. As equity evaporates and the recession swings into gear, people will walk away, as sniglet has been having us ponder for quite some time now.

The underwriting guidelines have not yet come back into "sane" territory for our current economic conditions, our current declining prices, and the lack of a social stigma of walking away.