bostonbubble.com

[Boston ITer]

[nickbp]

[BostonObserver]

Per the original question, I just came across this:

http://www.businessweek.com/print/lifestyle/content/apr2009/bw20090416_103126.htm

http://www.businessweek.com/lifestyle/content/apr2009/bw20090416_643612.htm

Good News: Option ARM Resets Delayed
The bad news: Low home prices and high unemployment could still punish borrowers when the reset happens sometime next year

By Prashant Gopal

Finally, there might be some good news for struggling homeowners. Thousands of mortgage loans that were supposed to reset at a higher rate this spring won't be changing, putting off the grim threat of foreclosure or bankruptcy for many Americans by as much as a year. Unfortunately, the reprieve will only be a temporary one.

A year ago, real estate forecasters were warning that spring 2009 would be the start of a whole new wave of foreclosures. Across the country option adjustable-rate mortgages (ARMs), an especially scary loan type often compared to a ticking time bomb, were set to detonate at an accelerating pace.

But something happened that few could have predicted. Interest rates dropped to historically low levels and the wave of resets could now be delayed until well into 2010. As a result, many borrowers—who have the option of making payments so low that they don't even cover the interest, which is then added to the original loan balance—now have some breathing room.

THIRD OF LOANS DEEPLY DELINQUENT
Credit Suisse (CS) estimates (click here to see the chart) that the resets will begin to accelerate next spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in September 2011. The current level is about $1 billion. About $500 billion of option ARM loans are outstanding, according to the bank. "Things have gotten pushed out," says Chandrajit Bhattacharya, director in U.S. Mortgage Strategy for Credit Suisse. "Right now it looks like the big increase is probably going to be somewhere toward the middle of next year."

Option ARMs typically reset after five years, at which point the monthly bill increases 65% or more. About 37.5% of option ARMs originated in 2005 are still outstanding, 63% of the 2006 vintage are outstanding, and 82% of the 2007 loans remain, according to Barclays Capital (BCS). And about a third of the outstanding loans in these years are deeply delinquent.

In a given month, between 4% and 5% of borrowers who are current on their option ARMs taken out in 2006 and 2007 default in the following month, says Sandeep Bordia, Barclays' head of residential credit strategy, who also expects resets to be delayed until next year. "These things have been performing horrendously," Bordia said. "I don't know how much of it will last into the recast."

MOVING OUT OF OPTION ARMS
But real estate analysts were predicting that many option ARMs would reset sooner as loan balances hit specified principal caps, typically 110% to 125% of the original principal. The decline in interest rates means that it would take much longer to hit the principal cap and many borrowers will instead face a reset only at the five-year mark.

The Mortgage Bankers Assn. is also estimating that the lower interest rates will delay the resets. But the group also expects that lenders will help borrowers move out of the option ARM products before they reset. Many of the investors who can't easily qualify for modifications and the borrowers beyond help have already lost their homes, says Michael Fratantoni, vice-president of single family research and policy development for the Mortgage Bankers Assn.

And the homeowners who are holding option ARMs when the wave of resets hits won't face as big a shock because interest rates have fallen, adds Fratantoni. "Interest rates have come down to the point where the resets that are going to occur are going to be a bit of a non-event," he says. "Very few borrowers will experience the recast." But Nicholas Chavarela, managing attorney for Orange (Calif.)-based America's Law Group, which represents borrowers negotiating modifications, says banks remain reluctant to reduce principal for underwater borrowers.

CUTTING DEBT-TO-INCOME RATIOS
The Obama Administration's loan modification plan, which only applies to owner-occupied homes, is a step in the right direction, Chavarela said. But lenders won't do what's needed unless they're forced to, he said.

Under the plan, taxpayers and participating lenders would share the cost of cutting borrowers' debt-to-income ratio to 31%. Loans terms could be extended to 40 years and interest rates dropped to as low as 2%. But option ARM borrowers would likely have to pay more each month, even with a modification, because they'd suddenly be required to pay both interest and principal. "The Obama plan needs to be built upon," Chavarela said.

But even if they can refinance many borrowers can't afford the higher payments. Philip Tirone, president of the Mortgage Equity Group in Los Angeles, said he reached out to borrowers with option ARMs, offering to help them refinance into a fixed-rate mortgage with a low interest rate. "For them, it's all about the payments," Tirone said.

TIME TO WORK WITH LENDERS
Keith Gumbinger, vice-president of HSH.com, a publisher of loan information in Pompton Plains, N.J., said the lower interest rates have helped to diminish the option ARM problem. But it remains unclear how many option ARMs are left to reset and how many borrowers will be able to get out of the loans before it's too late. Moreover, by the time they do reset it is unclear whether the economy will be better off. If home values and unemployment continue to weaken, it will become even harder to refinance. But the delay in resets gives some motivated borrowers time to work with lenders and negotiate a solution.

"I don't think this is going to be the tsunami that was forecasted a few years ago," Gumbinger said. "But it's probably bigger than a ripple in a pond."

Gopal writes about real estate for BusinessWeek in New York.

[GenXer]

admin: Actually, defense, believe it or not. Some companies have very decent job security, especially if you are in select departments and working on particular programs. Of course, you need to possess certain skills which may not translate well to the commercial world. Usually, depending where you are, you are mostly left alone to do your work, and even though the pay is average, job security is much higher than average, while flexibility is way above average. This is changing slowly though, but still true in some companies.

BostonObserver: As far as Alt-A resets, it all depends on the Treasury rates. So the 3 year and 5 year ones may be 'safe', but only in the interim. The 1-year are not safe by any means. As soon as interest rates rise, and the economy recovers (as much as that is still possbile), expect the interest rates to beat the house prices into the ground, including all of the aforementioned resets. Then the 3 and 5-year ones will be hurting bad. This is why I expect this market to last for a long time, and so jumping in is not an option unless you either have a trust fund or have enough money to start one.

[admin]

BostonObserver, Thank you for taking the time and effort to bring this article to everybody's attention. I would, however, like to request that when you want to share an article that you not copy and paste such a large portion of it into this forum. This might not be compatible with US copyright law. Please limit verbatim excerpts to one or two paragraphs at most and provide a link for the remainder of the article. (If you happen to be the original author or have obtained permission from the author to reprint more, then add "reprinted with permission.")

To the copyright holder of the original article, if you feel that the excerpt in this thread is being used in a manner that is inconsistent with terms that you allow for reproduction, please contact me so that it can be corrected. Either post your request within this thread or email me directly at admin@bostonbubble.com

Thanks,
- admin

[john p]

Admin:

You've been a little quiet as of late. What kind of stuff do you have juggling in your mind?

[admin]

[GenXer]

admin: Welcome to the club, so to speak. There are several new papers that came out (MIT and several other sources) with new analysis of the financial markets and prices. The results are not very encouraging in terms of long term prospects. Everything we've thought of as gospel is being turned on its head - and it is really difficult to understand, not because of the math (which is difficult) but because of our inability to make the switch from the conventional 'wisdom' to the reality implied by these discoveries. There is a huge rift in the investment advisory community, with many just throwing their hands up in the air (and continuing doing the same stupid thing they've done before). I'm yet to see a single investment manager who understands what they are doing in terms of portfolio risks (we know banks are clueless). This is the most difficult concept to grasp. A good place to start would be here:

http://www.edge.org/3rd_culture/taleb08/taleb08_index.html

[john p]

You know, that strategy might just work.

When you're younger you just hope to plug into an organization and learn your skills. When you get to the middle stages you get more of a senior role, but you're still at risk.

Once you get into the arena where you're brokering deals and you stand to gain profit, you're looking for the next client not the next job.

I think that by envisioning oneself as a cog in a machine and modelling out 3-5% raises and factoring in the risk factor of being laid off here and there makes this exercise a challenge. By hunkering down and focusing on how to grow your top line so you can clear these hurdles might make sense.

I actually came to the same conclusion back in like 1998. Real Estate remained about flat since like 1990 and I ran the numbers and said, hell, I'll get an MBA, double my salary and then take out a 20 year mortgage instead of a 30 year note. Then when I graduated in late 2000 the market plunged and my MBA wasn't going to help me. I ended up working for an ass who said straight to my face, "Your MBA means nothing to me." I had to take the gig because they had work. Anyway, take a look at the magazine "The Economist" and check out all the MBA adds out there right now. It reminds me of the mid 90's when everyone was getting their Masters in Business Administration.

I think instead of getting an MBA, one should consider trying to model out their own business. My wife worked for a big corporation for about 10 years and made them a ton of money and now she's working for someone her own age and making more money. I think that when an economy goes into contraction, the smaller companies thrive because they are leaner.

Make sure you build a team so you can compliment your skills. I would imagine there is still money out there that is looking for a vessel to carry it further faster. I think that that is why there was the dot-com bubble, there was an abundance of money because the babyboom was in their peak earning years and they were easily clearing their monthly nut and there was plenty of extra cash waiting to be put to use. It also needed a new realm of investment, sort of how the railroad changed things, the Internet created a whole new virtural world that needed to be populated.

Best of luck.

[JCK]

[admin]

[GenXer]

admin: Lottery's odds are known. The point Taleb is making is that he only bets on rare events for which the odds are not known, and moreover, are underestimated, so he can make a big profit because the underlying securities (i.e. options for example) are undervalued, so investing a set amount and possibly losing a small amount over time, you wait until the aforementioned random event, in which case you profit like a bandit.

You don't have to do what he does (I certainly wouldn't do it), because he has certain skills and better understanding of the options pricing. I use his ideas when building portfolios. There is actually a really good way to approach this problem without having to gamble your money in the stock market (which is what most people do). Using Taleb's framework, you can have a very good money management plan without having to make wild guesses as to where the market will be heading. This is why I read everything Taleb writes (including his mathematical papers). The beauty of his idea is that you do not have to have a model to do well - you just have to understand the risks and how to potentially profit from potential black swans in a prudent way while not losing your shirt in the process.

[GenXer]

john_p: smaller companies go belly up. This is why the returns of small company stocks over the past century did better than anything else - but you wouldn't want to invest in small companies if you want to actually see your money someday because they go belly up much quicker.

[JCK]

[GenXer]

JCK: Well, the problem is, the odds are still computable for a horse. If there are 20 horses, your chance is 1/20. So this is still like a lottery. Stock market events odds may be 1:10000. But the payout could be enormous if you use the right instrument. This is why a race track, a casino and a lottery MAKE money, rather than lose money, but a bunch of banks who make the wrong bet ALL lose money (while somebody who bet against them can make a lot of money). In some games, the house always wins - you don't want to play those games!