View Full Version : 60 Minutes: A Second Mortgage Disaster On The Horizon? (Alt-A, option ARM)

12-17-08, 05:59 PM
60 Minutes: New Wave Of Mortgage Rate Adjustments Could Force More Homeowners To Default (http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml)

Dec. 14, 2008

"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," (Whitney) Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."

In 2007, Tilson teamed up with Amherst Securities, an investment firm that specializes in mortgages. Amherst had done some financial detective work, analyzing the millions of mortgages that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the sub-primes, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgages.

"It was data we'd never seen before and that's what made us realize, 'Holy cow, things are gonna be much worse than anyone anticipates,'" Tilson says.

The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

"The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall," Tilson explains.

"What you seem to be saying is that there is a very predictable time bomb effect here?" Pelley asks.

"Exactly. I mean, you can look back at what was written in '05 and '07. You can look at the reset dates. You can look at the current default rates, and it's really very clear and predictable what's gonna happen here," Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.

"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" Pelley asks.

"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."

"How do you know that?" Pelley asks.

"Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they're being asked to pay today," Tilson says.

60 Minutes Video URL (http://www.cbsnews.com/video/watch/?id=4668112n)<SCRIPT>sharelink('share')</SCRIPT>

12-17-08, 06:24 PM
If it's on 60 Minutes the news must be at least a year old.

It is.

12-17-08, 06:31 PM
If it's on 60 Minutes the news must be at least a year old.

It is.

True, but I like to keep an eye on the local news and shows such as 60 minutes because they are still the predominant sources of information for a heck of a lot of other people and it helps to know where they are coming from.

edit: In this case it looks as if 60 minutes is about six months behind:D

12-17-08, 06:42 PM
I believe I posted this before but it bears revisiting in light of this post. Much pain to come, particularly in CA..


12-17-08, 07:28 PM
this is a good one from Bubble Markets Inventory Tracking. The NYFed has as a tool on the website that allows users to explore for local data:

Sunday, June 15, 2008

Subprime vs. Alt-A Maps Galore (http://bubbletracking.blogspot.com/2008/06/subprime-vs-alt-maps-galore.html)

Now where's the hotspots locally here in San Diego County? Let's start with the Subprime map. We see the usual suspects here, O'side, Escondido, San Marcos 92078, East San Diego 92114, as well as the South Bay with Chula Vista and Otay Mesa.

http://bp3.blogger.com/_QMoXJ8fOgo4/SFV1zGV4uiI/AAAAAAAACWU/Wv8reMA0B1k/s400/SD+Subprime.JPG (http://bp3.blogger.com/_QMoXJ8fOgo4/SFV1zGV4uiI/AAAAAAAACWU/Wv8reMA0B1k/s1600-h/SD+Subprime.JPG)

Now the map gets a whole lot darker with the San Diego Alt-A map. Which makes sense because this is a high priced real estate market in general. The usual areas that were already dark got even darker such as peripheral North County and South Bay. But check out the new friends joining ranks. Carmel Valley, 4S Ranch/Santaluz, and Downtown all become quite maroon while La Jolla turns a few shades darker as well.

http://bp3.blogger.com/_QMoXJ8fOgo4/SFV5ZsEaPDI/AAAAAAAACWc/Jfh1am0NMeE/s400/SD+Alt-A.JPG (http://bp3.blogger.com/_QMoXJ8fOgo4/SFV5ZsEaPDI/AAAAAAAACWc/Jfh1am0NMeE/s1600-h/SD+Alt-A.JPG)

If you are in the market to buy, you got to factor this map into your decision making process so you know what's looming in the next few years. As for the severity of the issue (if you remain unconvinced by the darkening of the map), remember Mr. Mortgage saw on the New York Fed site much more Alt-A than Subprime. I just checked the site myself and here's the figures:

Total California Subprime loans as of Feb 2008 (http://www.newyorkfed.org/regional/subprime.html): 489,801
Total California Alt-A loans as of Feb 2008 (http://www.newyorkfed.org/regional/subprime.html): 721,741