ok, that is good data, thanks.
I still need the 3/1 because it is most significant. However, using the 5/1 and the 1/1 is probably close enough.
Now I need to find the percentage of ARMs going back the last 3 years. If they are broken down by the exact type of ARM, it would be a dream come true.
I believe I have solved the credit event puzzle. Here is my theory.
The next credit event to going to be triggered by unsound financing products that are deeply imbedded in the real estate bubble. To illustrate, I will go through each of the products and discuss the options available to each type of borrower.
The 15 and 30 yr fixed rate loans. These are no brainers. Borrowers in this category can hang on indefinitely, as long as their income stream remains relatively stable or better. Assuming that most of these were taken out at interest rates lower than today's, no action is needed.
The 5 yr or longer hybrids. Assuming most of these were originated during 2003 or later, there are still a few years left.
The pure ARMs. These are the ARMs from day one. Borrowers have enjoyed a lower rate for a while but are facing constant adjustments now. If they have not converted to a fix, it may still be advisable to convert to a fix now if they intend on staying in the property indefinitely.
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The above loan products are similar to loans of old. The credit risk is influenced by old factors such as employment. The following products are new, and in my opinion, going to trigger the credit event.
The difference being that something WILL happen with each of these loans regardless of market conditions. The dirty word here is RESET.
How much is a reset? 2% in terms of interest rate. 40+% in terms of increase of monthly payments. 26% decline in the loan amount that the same payment can service.
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The 1 yr and 3 yr hybrids. These were what appeared to be somewhat conservative products a couple of years ago. If these borrowers have not refinanced into a longer term fixed by now, they would be facing a 2% reset. If they choose to refinance into a 30 yr fixed today, the rates are like to be about 2% higher than their original rate. If they choose to refinance into a similar 1 to 3 yr hybrid, they may be able to get off with a 1% or so higher rate.
The subprime 2/28s. I have discussed these in details previously. There is no escape of those who had not taken action already. Unless their FICO have drastically improved, making them eligible for better financing, they are looking at the dreaded 2% or more reset one way or another.
The ARMs with the 1% teasers. These are the killers but fortunately, I don't think there are many of these out there. These borrowers could be their payments doubling every 6 months or less. |
