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Assets in Free Fall

Bennet Sedacca Feb 17, 2009 12:15 pm


		Casualties of ongoing crisis too numerous to calculate.

Option ARMs

Typically, Option ARMs allow the borrower to make a low monthly minimum payment for 5 years, after which the loan is recast, increasing mortgage payments. However, under the minimum-monthly-payment scheme, the difference between the minimum payment and the interest payment will be added to the mortgage balance, which could cause negative amortization. When the negative amortization cap is reached (i.e. when the balance of the mortgage grows to 110%-125% of the original balance), the loan will be recast earlier.

Option ARMs, or “exploding ARMs,” are about to begin resetting in size this month, and at precisely the wrong time. The US economy is currently shedding 600,000-700,000 jobs per month.

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ARM Reset Schedule

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Just imagine the number of delinquencies/foreclosures/repossessions, just as the economy slides quickly into the abyss. The Option ARM market totals nearly $750 billion, and these loans were often granted without full documentation of borrowers' incomes and assets (allowing "liar loans" to run rampant).

As of December, 28% of all option ARMs were either delinquent or in foreclosure, a number I fully expect to climb to 50% after the brutal one-two punch of job losses and rate resets. The largest issuer of this paper was Wachovia, now owned by Wells Fargo (WFC). Wachovia had $138 billion of these loans on their books when Wells came in, so I wouldn’t be surprised if Wells ends up another casualty of the crisis.

So have you had enough yet? Sorry - there's more. Much, much more. But first, an updated table from Bloomberg showing losses to date from the credit crisis at the bank/broker level.

Total Losses from Credit Crisis to Date-$1.1 trillion

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Comments (14)

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Paul Callahan

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02-19-2009, 8:16 am
A great deal of money has been spent with the intention that an investment was being made. These "investments" have proved to be largely bad. A bad investment can only be written off. I see this writing - off process called "dele Read More

Jesper Hansen

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02-19-2009, 9:50 am
You're missing the point, Michael. The author is using the resetting of option ARM's as a reason for why things are going to get a lot worse than now, and even has a chart of when the ARM's are resetting. The least you could expect Read More

Fred Fischer

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02-19-2009, 2:01 pm
Also, 49% of the option ARMS are in california Read More

Bennet Sedacca

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03-01-2009, 12:59 pm
Hi Eric. I guess having a 14 and 20 year old makes me 'barbell' my musical tastes. I like both versions despite being in my 50th year! Cheers, Bennet. Read More

Eric Worthen

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03-01-2009, 2:15 pm
Understood. My fifteen year old would agree with you. I guess I need to start to "barbell" my musical tastes like you as I'm 45 and have a 9 year old daughter into "High School Musical" and grow Read More


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