California's coming Option ARM crisis

Good morning. Various housing and real estate links from here and there:

The Economist, via Patrick.net, warns about the "Ticking Time Bomb" in the American housing market -- Option ARMs, which allow homeowners to pay less than even the interest on their loans, until a day of reckoning when payments rise and ARMs often explode: "Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from 0.49% in the last quarter of 2007 to 3.91% in the second quarter. But the real crunch will come when the mortgages 'recast', forcing borrowers to start making full payments." Oh, and The Economist, quoting Barclays Capital, says most of these time bombs are in California.

From Calculated Risk: Single-family housing starts are at their lowest level since 1991.

If you want extra credit today, there's plenty to read about the doomed duo, Fannie and Freddie. Brad Setser explains the key role Fannie and Freddie played until recently in allowing foreign central banks to invest in the U.S. housing market -- a key source of bubble money.  And from Patrick.net, here's a link to the full Barron's article arguing Fannie and Freddie are toast. The logic is pretty simple: to stay independent, Barron's argues, they need to raise about $10 billion each. The problem is, who's going to invest $20 billion in companies with a combined market value of just $12 billion? You know the answer, don't you? Of course you do, it's right there in front of you: You're going to invest in them, through your Treasury Department.

--Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[Jonathan]

Ooooooh! Another bailout. Its my patriotic duty to help out these GSEs!

[mike]

i fail to see how this is far different from the great depression. the economy takes a dump of larger than normal proportions and the government comes along and bails it out. there is NO WAY OUT OF THIS SCENARIO in a capitalist economy. besides can anyone tell me where people are doing so much better in the world??? and dont give me any of that everyone is rich in switzerland nonsence.

[E]

Anybody have the tally on how many were combined Option-ARM/Liars Loans?

[CD]

It is a global recession, it will never be business as usual from now on. Maybe that is something we could discuss here. Changes... Walmart. Cosco, small cars.Driving less, no malls. Basics, no luxury, just what is needed to go on. Cutting it to the bone. Don't tell me your habits have not changed in this recession.
We are all in an emergency mode. Where to cut ? I am really worried about the FDIC. They will not be able to keep up.

[flip]

I have two questions:

1) Is there any way to determine by zip code the number of ARMS that could reset this year in Los Angeles County?

2) Do banks ever have to disclose how many homes they own but have not put on the market?

I live in the Miracle Mile neighborhood and I recently saw a home go up for sale that was around 800k. It was a short sale and it was bought for 1.1 million in 2006. A week later, the home was pulled off the market, according to Redfin. Either the owner renegotiated with the bank, which seems unlikely, or the bank did not get what it wanted for the home. If the latter is true, this home is part of the "shadow inventory."

Are banks compelled at any point to disclose what homes they are holding? What happens to these homes when the eventually have to sell them. Do they give ito an auction?

[Nick]

To mike:

The current situation is far different than the great depression because in 1930, the US had a gold standard currency and relatively small national debt, and no really easy way for the government to deficit-spend large percentages of the GDP to bail everyone out. We still have 10ish years of depression because of failed socialist responses, and we still have lingering Ponzi entitlement schemes burdening our society from the aftermath of the depression, but the stable currency, underlying production capability, and wellness of the underlying economy enabled the country to recover once the socialist were no longer in control of the government.

In the current case, however, we have no limit to the potential overspending by the government, we have destroyed and/or exported our production capability in favor of a debt/consumption based "economy", we have socialist programs from the depression weighing down the country with long-term Ponzi scheme obligations, and our currency stability is controlled by foreign governments willingness to continue financing our out-of-control debt. On top of that, we're poised to elect another socialist government, and try to spend and entitlement our way out of our spending and entitlement mess.

The problem, of course, is that for a capitalist economy to function, you can't have a socialist government taking all the money and funding entitlement and socialist programs; it just doesn't work. It was going to collapse in the next 40 years anyway (unless you think politicians would abolish medicare and social security, haha), no huge surprise it's happening a bit earlier. Also no huge surprise the country is electing people to create another depression this time; doomed to repeat and all that. However, I'd venture this time will be different; the country is just not economically secure enough any more to weather the governmental idiocy about to be thrust upon it. I do still hope I'm wrong, though.

[Nelcisco]

Flip asked: is there any way to determain by zip code the number of A.R.Ms that could reset this yr in LA co.

I would think that the zip codes that'll most likely reset are in the higher end westside, parts of Burbank, high end parts of the valley, beach communities etc., lets face it, alot of million dollar homes we're bought by non-millionaires, just people with "good jobs" (whatever that means) in the real world
using option A.R.Ms, so they're the ones most likley to be in trouble.

[The original RZ]

Why is this a "crisis"? It seems to me that it's another step in the overall "correction."

[Nick]

"Are banks compelled at any point to disclose what homes they are holding? What happens to these homes when the eventually have to sell them. Do they give ito an auction?"

I'm curious about this also. House ownership is supposed to be a matter of public record, right (all changes of ownership need to be recorded, etc.)? If so, all the information about how many properties (and which specific properties) each bank is holding should be in the public record. Anybody know if that's true, and if so, if anyone has aggregated the information anywhere? It would seem to be valuable information, for stockholders of public banks at the very least...

[NewtoLA]

I have to agree with Nick. What we need is another Herbert Hoover! I don't know why those socialists bother regulating markets. It's social darwinism right? If you are not rich you do not deserve to live. Let's get rid of those big bad social programs that provide health insurance to old people. The fact that no unregulated market would provide insurance for them doesn't matter. Let them die. They are old.

Wahhh. My taxes are too high.

[Kathy]

I would also be curious about the zipcode ARM data; my 90025 zip (WLA/Brentwood adjacent) has been going through the roof in median price and also declining in foreclosures, according to DataQuick. And yet, on Foreclosureradar.com, it shows quite a few nod's, auctions and bank-owned.

[WhatMeWorry]

"Are banks compelled at any point to disclose what homes they are holding? What happens to these homes when the eventually have to sell them. Do they give ito an auction?"

I'm thinking the county tax assessors office will have the data.

http://assessor.lacounty.gov

[Helpy Helperton]

Three cheers for NewtoLA!! Well spoke

[future renter]

I have an option-arm (in OC), had my house on the market since last July, no bites. Bought in '04, refied due to divorce in '06.
Called my 2 mortgage cos. all last summer/fall of '07 knowing my neg-am would explode by end of 2009-10. American Home said "we don't redo mortgages" since they are now only a servicing co. and Indy Mac NEVER returned my 100-200 phone calls, just took my # and said they'd get back to me. I was current on my pmts. so they didn't care.
I took my house off the mkt. in early Aug. '08, stopped making pmts. in June and am filing bk. The mortgage cos. can have their house back....I'm not waiting for the loan to recast @ 125%
The price I pay is ruined credit and the banks/lenders will be eating the %#@# sandwich.
I'm ok w/ that.
The irony is that both cos. are sending me letters saying "gee, let's lower that interest rate so you can get current."
I have 2 words for that.

[jb]

The banks, politicians and wall street are in bed together and holding our country hostage - these are the real terrorists.