We haven’t heard about Option Arms — Adjustable Rate Mortgages — for a while, so we thought the below was worth reproducing.
From US bond blogger, Across the Curve’s John Jansen: This was in a morning note from [Arohan] Kohli of RBS and I thought it worthy of reproduction here. I can not reproduce the chart he referenced. I also visited the Saint Louis Fed website and could notlocate more detail.
“Turning now to an announcement that caught our eye yesterday, the St. Louis Fed stated that they were concerned about Option Arm and Alt-A loan delinquency rates. I am too. Attached is a chart of delinquencies in the Option ARM universe. The key takeaway from this chart is that low rates have allowed some borrowers in this type of loan to make the minimum payment and still cover at least a part of their principal or delay the time till they reach their negative amortization cap. Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms. If our economists are right about the size and timing of the Fed Funds rate hike (approx. 1% per quarter starting in Q2 next year), the impact on borrowers of these types of loans could be very significant. Those who are slightly delinquent or barely holding on could see their payments move substantially higher with the impact possible late next year.”
Never fear John Jansen, FT Alphaville is here. We’ve got Kohli’s nice chart to go along with the words:
Of course, the US government can do a lot to stem a second wave of foreclosures — Hamp, Payment Reduction Plans, Hope for Homeowners-type stuff — but it’s worth mentioning nonetheless. In fact, how house prices will perform sans-government support is a point picked up in the St. Louis Fed’s comments — which we’ve also found.
Oddly enough the article is entitled “Home Prices: The Case for Optimism” and is based on the Case Schiller housing data, released on Tuesday, which showed a fourth consecutive increase in US house prices. But there’s not much optimism in this piece. Go figure.
Anyway, here’s what St Louis economist Rajdeep Sengupta and Yu Man Tam say:
Many analysts are cautiously optimistic that the house price decline has ended, citing that house prices increased in June and July. There are several reasons for being cautious. First, the government is currently providing significant support to the mortgage market. On the demand side, the American Recovery and Reinvest ment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence between January 1, 2009, and November 30, 2009. With the tax credit due to expire by the end of November, it will be important to see if the demand for housing can be sustained after it expires. On the supply side, the Federal Reserve is purchasing up to $1.25 trillion of agency mortgage-backed securities through a program that began in January 2009 and continues through the first quarter of 2010. The aim is to “reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”3 In light of this, it remains unclear how the housing market will perform in the absence of these government measures.
Meanwhile, the number of mortgage delinquencies and foreclosures in process rose during the second quarter of 2009. In a study that includes 64 percent of all outstanding U.S. mortgages, the Office of the Comptroller of the Currency and the Office of Thrift Supervision report that serious delinquencies (at least 60 days delinquent) increased by 11.5 percent from the previous quarter. 4 On the other hand, home retention actions (including loan modifications and payment plans) initiated under the “Making Home Affordable” program rose 21.7 percent over the first quarter. This in turn kept the number of newly initiated foreclosures stable despite rising delinquencies. However, another cause for concern is the number of rising delinquencies on particular mortgage products such as Alt-A loans (particularly those with 5-year teaser rates) and payment-option adjustable-rate mortgages. The concern here is that these products might bring about a second wave of foreclosures, thereby leading to a further decline in home prices.
Related links: $134bn of US Option ARM RMBS to recast by 2011, Fitch says - FT Alphaville Charting the mortgage crisis - FT Alphaville More than you probably ever wanted to know about the Hamp - FT Alphaville
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