Two years of a deep and prolonged recession and we still can’t seem to get a hold of the toxic assets plaguing the books of banks. Much of this comes from the scamming and blood sucking from banks on the taxpayer. How can $13 trillion in backstops and commitments not resolve the problem? First, the banking system operates as a crony operation looking to serve its own interest even if it comes at the detriment of the entire economy. News coming out this week simply reaffirms what we have been saying for the entire year. The Alt-A and option ARM wave is imploding right on schedule.
When I wrote about the Alt-A loans back in May of this year, we put a ballpark figure of $1 trillion for toxic mortgages. So after all the gimmicks and money being thrown at the system it turns out that we still have over $1 trillion in junk mortgages. A recent analysis by First American CoreLogic put the amount of Interest Only mortgages at $908 billion with 2.8 million loans active. Fitch Ratings came out this week showing that there are still $189 billion in option ARMs in the system. For all you folks who thought that all the option ARMs were modified, the data shows only 3.5 percent of the nearly 1 million loans have been modified. And those that have been modified still re-default at incredibly high rates.
So let us put this into perspective with current data:
Now a couple of things to mention. There is overlap between a few categories. For example, a large number of the option ARMs fall under the Alt-A category. Many Interest Only loans are also Alt-A loans. A better estimate is the specific category of Option ARMs and Interest Only and that is a combined total of $1.097 trillion. This is the number of loans out in the system currently. Plus, there are still many active subprime loans. These loans are part of the zombie bank balance sheet.
Yet the reason these loans will be so problematic is how borrowers are viewing the future:
“(NY Time) With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.
The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.
“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”
Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”
Praying for another epic housing bubble is highly unlikely. The Mollers by the way bought in over priced and over hyped San Diego. San Diego, just like Los Angeles and Orange counties has a legion of people that are praying for another boom to come along. Forget about jobs or income, they conveniently ignore the 11.9 percent unemployment rate and the reality that the state has had to budget some $60 billion in budget cuts. If we use a better measure of unemployment and underemployment, the state has a rate above 22 percent:
What does this data tells us? First, these loans are doomed to fail. It isn’t a question of whether they will fail but how bad will they fail. The issue of shadow inventory is important because many of these banks are simply not moving on homes and ignoring the foreclosure process completely. Not true? Well look at some examples across the country:
“(Cleveland) Renetta Atterberry thought she had lost her East 102nd Street house. So she was shocked to learn in January — five years after her mortgage company filed for foreclosure — that it was still in her name.
Worse, the long-vacant rental home had been vandalized and she faced a raft of housing code violations. Since then, she has been saddled with debts of about $12,000 to pay for demolition and back taxes.
“I thought I had nothing else to do with that home,” said Atterberry. “I was so embarrassed and humiliated by this.”
Her mortgage company didn’t buy the house and never took it to sheriff’s sale to see if somebody else would, leaving Atterberry the legal owner, responsible for upkeep and taxes.
These so-called “bank walkaways” are another troubling development in the foreclosure crisis, particularly in cities like Cleveland with weaker housing markets, say housing advocates and government officials.”
In many other areas, banks are simply walking away from homes. In fact, it is a cold and calculating move. If they take possession of a property, they are responsible for taxes and maintaining the property according to city ordinances. Instead, they do nothing. In their calculus, they figure legal fees and handling the foreclosure process correctly outweigh doing absolutely nothing. You would think with trillions in bailouts banks would have a structured system in place after two long years into the crisis but they are as incompetent as they ever were. That is why it is maddening to entrust the people that created this mess to get us out of it. We need a new group and a new way of thinking. A first easy step is to eliminate the CEOs of every single top bank in the country. Also, we should claw-back any bonuses and compensation from these scammers.
If you think it couldn’t get any more ridiculous, the U.S. Treasury on their FAQ actually tells you how you can contribute to help pay down the national debt! Bwahahahaha! You must have cajones the size of watermelons to ask for something like that.
But back to the toxic loans, the clock has now stopped ticking:
“The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.”
So much for these loans being resolved. You might be asking, what have banks been doing with all this money? Well first, they haven’t done much to stop nationwide foreclosures:
So not much is being done there. Maybe they’re lending more money. Nope:
“(MarketWatch)- U.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit. Consumers have retrenched since the financial crisis hit the economy in full force last September. Credit has fallen in every month since then except January.”
This really leaves you scratching your head. If they aren’t helping on the foreclosure front and aren’t lending, then what are they doing? How about paying out massive profits to their cronies:
“(Bloomberg) — Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.
Second-quarter net income was $3.44 billion, or $4.93 a share, the New York-based bank said today in a statement. That surpassed the $3.65 per-share average estimate of 22 analysts surveyed by Bloomberg and was 65 percent higher than last year’s second quarter.”
So that’s where the money is going. The pretense that the money was to help the average American consumer was a gigantic stinking load so they could continue paying one another massive amounts of money. Incredibly for bringing the country near the brink of another Great Depression they are rewarded. We still haven’t seen a comparable Pecora Investigation. We have a committee looking into the causes as if we need to understand anymore! The banking system is corrupt to the core! It produced a minion of greedy short sighted thinkers that paper pushed this country into believing flipping homes to one another and sticking on granite countertops to every home was the ultimate sign of success. A massive and epic fraud. This is something we already know. Yet here we are allowing these same players to continue to game the system while 26.3 million Americans are unemployed or underemployed seeing the middle class evaporate like a drop of water in the Mojave Desert.
Leave it to California to have these same players proclaim that the bottom is here. Where do you think most of the $1.1 trillion in loans sit? California, Florida, Nevada, and Arizona own 75 percent of the option ARMs. Alt-As? California holds 42 percent of all loans categorized as Alt-As. Yet here people are thinking it won’t impact them in Pasadena, Culver City, or other semi-prime areas.
And guess what? There is this naïve notion that somehow these areas are populated by rich households able to withstand any economic hardship. Right on time to eliminate that wrong perspective:
“(Bloomberg) Wealthy Families Face Bankruptcy on Real Estate Crash
Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.
More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.
Chapter 11 is more expensive and time-consuming for debtors and creditors than a Chapter 7 liquidation of assets. Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine, a credit-counseling and research group.
“You’re living on the edge, you’re juggling those financial balls,” Linfield said. “When one ball goes, they all fall down.”
People forget that a vast majority of people live on the financial edge. If you live in keeping up with the Joneses areas like Orange County, if you make $150,000 many times you are spending $175,000. Make $300,000? Some spend up to $400,000. That is the issue. Americans from poor to rich spend more than they make. This is now fundamentally changing by force. People forget that a million dollar mortgage carries enormous costs. In some areas like Irvine you saw million dollar homes going to people that made $200,000! Maybe this is out of the realm of most people. Take a look at this sample option ARM case:
“(NY Times) Mr. Clavon, 63, was planning to sell the home in a few years and retire to Palm Springs. So he got a loan called an option adjustable rate mortgage, or option ARM, which allowed him to pay less than the interest for the first five years.
On his annual salary of $100,000 as a television camera operator, he could afford the $2,200 initial mortgage payments. And he planned to sell the home before the mortgage reset.
Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000.”
Mr. Clavon is in good company. As it turns out 94 percent of option ARM borrowers made the minimum payment.
His payment is scheduled to go over $4,000 in two years. In fact, it might go much higher since he has paid zero to his principal. Let assume he refinances his mortgage to a 30 year fixed jumbo:
Given Mr. Clavon is 63, what bank is going to offer him a 30 year loan on a home that is underwater by $280,000? According to our numbers, he will pay off the home at 93 if he goes with a 30 year fixed mortgage. Why not go for the 40 year loan mods and be done at 103? The home is located in California (of course). Look at the above though, even with a refinance his principal and interest payment alone is $4,298. Add in insurance and taxes and his payment goes up to $5,000! That will virtually eat 100 percent of his net pay.
You might ask why banks have not dealt with these loans. Easy, that loan of Mr. Clavon is still on the bank balance sheet at face value. Do you think they want to lower it to $400,000 and eat the loss? They will go under. Shadow inventory is here and only those who are blind choose to ignore it.
This case isn’t unique. You can rummage through the multiple Real Homes of Genius examples and you will realize California is littered with these mortgages. People and banks praying for another boom so they can off load these homes to other suckers. Sounds like a fantastic strategy to me.
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