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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (24868)	1/18/2005 3:18:19 PM
From: russwinter	Read Replies (4) \| Respond to of 110194

<do not rise as expected?> Fair point, but even so I'm evaluating this ARMs tsunami with today's rates and perhaps assuming one more fed funds increase. Plus the agency spread is compressed through foreign CB manipulation, and could widen if the Wizards at Oz stop. Think we already have plenty to work with, as most of the 1 year and 3/1 hybrids (from 02) that reset between Nov. 04-April, 05 will be going 150-200 bps higher just assuming the 1CMT stays at today's rate of 2.87%, and the 1 LIBOR at 3.25% (of course add the typical 2.75% margin to get the new rate), so if it goes even higher it will be worse. I'm not sure how much the COFI was used because during the financing boom it was 75 bps higher. For now it might be favored for ARMs, as it has a lag set that reflects Nov. rate (2.03), which in turn reflects cost of funds for banks on old CDs, etc. It gets adjusted up again Jan. 31 for Dec. There was a lot of financing activity in both new home purchases and equity extraction, especially in 1Q, 04, when as this NT chart (page 4) ntrs.com shows Bully and Joe Sixpack extracted over $70 billion from home "equity" for his consumption binge. There was a string between Jan. 21-May 12, 2004 when the mortgage app index ran at 742-1117, and on very high dollar volumes. Finally on May 19, the MBA mortgage application went below 700 and has stayed there since (588 last week, not sure why the cognoscenti are piling into financials and consumers today, but obviously old habits die hard, and little home work is being done), so the bloom by now has definitely come off the extraction rose. So now they get to pay the piper as all those interest rates are reset. According to the Fannie Mae plus and minus of ARMs article that I posted earlier, 34% of all loans during this mania phase (1h,04) were ARMs. We also know a good portion were subprime (would love that %?, and will look for it). Of those, 30% were one year, so 10% of all mortgages taken out during that "hot period", are resetting. And don't forget 3/1 hybrids were the rage during the 2002 mutha refi boom (18% ARMs), and they are due to be reset. In the 04 experience 15% (about 5% of total mortgages) of ARMs were 3/1 hybrid, but of that interest only (IO) got popular, although I'm trying to find the number. Those won't be reset now, but in early 07, payments are adjusted not only for rates, but also for 30 year prinicipal amortization, so that's your second wave of trouble that ought to keep housing down for a number of years. Then you have same on 5/1's which are now 40% of ARMs. Might mark 2009-2010 as the final foreclosure period of a deadly housing bear market. There's plenty coming right now and over the next several months. House as ATM card is going into the scrap heap.