posted on Nov, 11 2009 @ 06:30 PM
"Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely
in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us."
"I should also note some features of the resets we are now beginning to observe. It is tempting to think that with Treasury yields fairly low,
mortgage resets might be fairly benign in terms of their impact. The problem is that these Option ARM and Alt-A structures were specifically designed
as "teasers" - allowing loans to be made without documentation of creditworthiness, in return for post-reset interest terms that were generally
higher than a documented lender would have paid. The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR.
Instead, they reset to a "premium" spread above those rates. That "yield spread premium" is precisely what the homeowners agreed to in return for
the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value).
Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport
very high loan-to-value ratios.
Similarly, Option ARM mortgages typically have very permissive payment schedules prior to the reset date, which have allowed homeowners to essentially
live in these houses (at least temporarily) with fairly discretionary payments. The data suggest that most of these borrowers have allowed their
mortgages to "negatively amortize," allowing the loan balances to grow larger even as property values have depreciated. Once again, the resets on
these are problematic for borrowers with questionable creditworthiness, who bought the homes largely in anticipation of price appreciation. For these
borrowers, the transition from discretionary payments to more demanding terms is unlikely to be smooth."