Option ARMS and Alt A Via RBS Securities

October 29th, 2009 8:18 am | by John Jansen |

This was in a morning note from AAron Kohli of RBS and I thought it worthy of reproduction here. I can not reproduce the chart he referenced. I also visited the Saint Louis Fed website and could notlocate more detail.

“Turning now to an announcement that caught our eye yesterday, the St. Louis Fed stated that they were concerned about Option Arm and Alt-A loan delinquency rates. I am too. Attached is a chart of delinquencies in the Option ARM universe. The key takeaway from this chart is that low rates have allowed some borrowers in this type of loan to make the minimum payment and still cover at least a part of their principal or delay the time till they reach their negative amortization cap. Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms. If our economists are right about the size and timing of the Fed Funds rate hike (approx. 1% per quarter starting in Q2 next year), the impact on borrowers of these types of loans could be very significant. Those who are slightly delinquent or barely holding on could see their payments move substantially higher with the impact possible late next year.”

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  1. 17 Responses to “Option ARMS and Alt A Via RBS Securities”

  2. By Griff on Oct 29, 2009 | Reply

    if you/anyone were able to track down a Laurie Goodman (Amherst securities) report, probably get all the details interested persons may ever need. Absent that being available, Rod Dhubistky’s team at Credit Suisse has also done nice work in the past on securitized MBS.

    oh, those wonderful option arm loans !

  3. By superduperdave on Oct 29, 2009 | Reply

    1 percent per quarter? fat chance. see the japanese experience…

  4. By Peter Duray-Bito on Oct 29, 2009 | Reply

    The Fed isn’t a functioning bank any more and is the wrong place to look anyway. Most of these option ARMs are tied to LIBOR. It ain’t going anywhere, either.

  5. By Bman on Oct 29, 2009 | Reply

    In my opinion we have seen the alt-A crisis already – it has been hedged and markets are desensitized to it. History shows us that the next crisis isn’t even on the radar screens yet.

  6. By Bob_in_MA on Oct 29, 2009 | Reply

    Many, though I’ve never seen real figures as to how many, Option ARMs have an escalator factor (I can’t remember what it’s called)that may cause the minimum payment to rise by a few percent each year, independent of interest rates or the neg am cap. There’s a spreadsheet Tanta put up at Calculated Risk that illustrates this.

    That might push some people over the edge.

  7. By Gary on Oct 29, 2009 | Reply

    Bman — I believe if you check the official records, the banks all claimed to be hedged for mortgage exposure back in 2007 also. Lots of newspapers were asking if housing was a bubble (it was on the radar screens), but everyone in the markets said not to worry.

    I forget… how did that work out for the banks again?

  8. By Bman on Oct 29, 2009 | Reply

    Gary – I knew you’d be back for more. Just fine – they got paid.

  9. By Gary on Oct 29, 2009 | Reply

    Bman — the banks went insolvent, shareholders got diluted in half even before factoring in the share price drop. Some (senior) bank employees got paid, many others got pink slips. Others remain employed on vastly smaller salaries and no bonus

    Dick Fuld, Angello Mozillo, and a few other guys got paid. Everyone else got scr#wed

    If that’s your idea of victory, I would hate to hear what you think is a loss.

  10. By Bman on Oct 29, 2009 | Reply

    Gary – sorry, I thought you would catch the sarcasm. Try the decaf – it has just as much flavor.

  11. By Gary on Oct 29, 2009 | Reply

    Gary’s dead man. Gary’s dead. His head just exploded after he saw all the stupid things banks are doing this last year

    Little late for decaf 🙂

  12. By Bman on Oct 29, 2009 | Reply


  13. By Charles Swann on Oct 29, 2009 | Reply

    I agree with Bob_in_MA, I think Aaron missed the point with the Option ARMs. If they are recasting it does not matter what the interest rate is, those borrowers have not been paying a full amortizing payment.

    One can only hope that some of these borrowers can refi their mortgage before they go under.

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